Angela: Is it better financially to dip into RRSP’s before age 65 or after?

The idea of starting to draw money out of RRSP for many people reaching age 60 almost sounds like blasphemy. It is conceivable for many at this point to have held the account for over 40 years!

It is important to remember that the purpose of this investment account is for retirement. At age 72 the government forces your hand to start withdrawing from your RRSP at specified percentages. Therefore, it can make sense to start drawing your RRSP in your 60’s to lessen the tax burden at age 72 and older. The minimum withdrawal percentages at age 72 are based on the total of your investments held within the RRSP at the beginning of the calendar year (at age 72 this account will be called a “RRIF”).

So how do we determine whether RRSP should be withdrawn? At TCM we complete a financial projection of your retirement income until life expectancy and calculate what your average tax rates are estimated to be. This calculation shows us whether we can “smooth out” the taxes by starting to draw on the RRSP between ages 60 to  72.

In terms of drawing on the RRSP before or after 65, there are a few considerations around number “65.” First, Old Age Security payments will juice up your income. Second, the pension income credit begins, which gives taxpayers a 15% credit on the first $2,000 of pension income they receive. Payments from a RRIF are included in pension income after age 65.

At the end of the day there is no single prescription for when to start drawing your RRSP. However, conducting proper retirement income planning can help you understand what will work best for your situation.

Enjoy the weekend everyone!

– Taylor