Weekly Tax Tips
When should I start to withdraw money from my RRSP?
20 Aug 2009
This depends on your personal situation. In order to take full advantage of the tax deferrals offered by an RRSP, you should wait until the end of the year in which you turn 71 and then either purchase an annuity or transfer your RRSP assets to a Registered Retirement Income Fund (RRIF), depending on which best suits your needs.
However, you may require retirement income from your RRSP prior to age 71. When you do need money, you can withdraw the funds you need (remembering that withdrawals are fully taxable). You could also purchase an annuity or transfer your RRSP assets to a RRIF at any time prior to the end of the year in which you turn 71.
Also, it may make sense to purchase an annuity with some of your RRSP funds or transfer funds to a RRIF when you turn 65, if you don't have other income that will qualify for the federal pension income tax credit of $2,000 each year. Income from an annuity or RRIF at age 65 or over is considered to be pension income for purposes of this credit. To date, not all of the provinces or territories match the federal credit amount. So, keep in mind that not all of the extra income will qualify for a provincial/territorial pension credit.
In addition, income eligible for the pension credit is also eligible for the new pension income splitting rules. Under the new rules, a recipient of eligible pension income can transfer up to one-half of their pension income to his or her spouse. Where the pension recipient is in a higher tax bracket than the transferee, this splitting of the pension income can result in a tax saving. Also, a benefit can arise if the transferee spouse can claim the pension credit on the income transferred. Although, it is also important to consider the impact of the pension income transferred on tax credit amounts that are based on net income. Finally, when creating a source of eligible pension income (by using a RRIF or annuity), remember that you will have to pay tax on at least ½ of the income.
This tax tip is a publication of BDO Dunwoody LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 20 Aug 2009.
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