It is sensible to ask the query, however watch out no matter you do would not wind up costing extra money in the long term
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By Julie Cazzin with Allan Norman
Q: My spouse and I are 83 and 80, respectively, and I’m shedding my Outdated Age Safety (OAS) because of dividends and my registered retirement revenue fund (RRIF) withdrawals. I want once I was youthful that somebody had instructed me dividends may very well be an issue as a retiree. I’m pondering of cashing out my RRIF this yr and cashing in my shares for index funds so I can gather my OAS pension. Does this make sense? Our tax-free financial savings accounts (TFSAs) are maximized, I’ve $600,000 in RRIFs in addition to a pension of $45,000 per yr, and my spouse has $490,000 in a RIFF. Now we have non-registered investments of about $3.5 million with a dividend yield of about 3.2 per cent, and a small rental in my spouse’s title with an revenue of $9,000 per yr. — Tim
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FP Solutions: You’re in a great place, Tim, and it’s sensible to consider find out how to decrease your taxable revenue to scale back OAS clawbacks, which apply in case your internet revenue exceeds $90,997 in 2024. And you’ll have to repay 15 per cent of the surplus over this quantity to a most of the entire quantity of OAS obtained. Simply watch out that you simply don’t do one thing that may price you extra money in the long term.
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Don’t beat your self up about dividend investing. If, if you have been younger, you have been suggested that future dividends might lead to OAS clawbacks, you might not have the cash you’ve got at the moment. Dividend investing is a relatively straightforward inventory choice technique, making it fashionable with DIY traders. That, plus the truth that worth shares — typically dividend payers — have traditionally outperformed development shares.
At the moment, your shares are producing a gradual move of taxable dividends that you’re reporting in your tax return. Nonetheless, you could report the grossed-up (38 per cent) dividends, not the precise quantity of dividends obtained. For instance, if you happen to obtain $100,000 in dividends, you report $138,000, which is the quantity used to evaluate OAS clawbacks. After the clawback evaluation, the dividend tax credit score is utilized, bringing down your taxable revenue.
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Dividends are one tax subject in a non-registered account. Capital good points, that are the distinction between the e-book and market worth of an asset akin to shares or funding actual property, are the opposite tax subject, and they’re going to additionally impression your OAS eligibility.
The problem with holding particular person shares in a non-registered account is the tax drag (the discount in potential revenue or development because of taxes on funding good points) created by dividends and capital good points when buying and selling shares.
My guess is you might be pondering of switching to index funds as a result of they are typically extra tax environment friendly, are longer-term holds and, in keeping with the SPIVA experiences — which examine returns from lively fairness and fixed-income mutual funds and their benchmarks — usually tend to outperform managed portfolios.
In relation to RRIFs, I typically recommend to folks beginning retirement not to attract greater than wanted until the surplus goes into one other tax shelter akin to a TFSA. The explanation for that is due to the tax drag I described above.
If you happen to draw extra cash out of your RRIF, you pay tax and have much less cash to reinvest. In your case, Tim, that quantities to about 40 per cent much less or much more, relying on the quantity you draw out of your RRIF. You’re additionally topic to the tax drag of dividends and capital good points if you put money into a non-registered account.
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Having mentioned that, as you draw nearer to the tip of your life, there’s a tipping level when it begins to make sense to attract out of your RRIF and put money into a non-registered account. Within the yr of your demise, your marginal tax fee (in Ontario) shall be 53.53 per cent. If you happen to can draw cash out of your RRIF at a decrease tax fee within the yr previous to your demise, that’s higher than leaving all of it to the tip when it’s taxed at the next fee.
Similar to the youthful retiree withdrawing extra from their RRIF, you might be nonetheless confronted with much less cash to speculate and a tax drag. The distinction, utilizing the instance above, is that there’s just one yr of the tax drag, and if you happen to had left the cash within the RRIF, just one yr for the tax-deferred development to make up for the bigger tax fee within the last yr.
I used to be curious to see what would occur if you happen to withdrew all of your RRIF cash now at age 83, or sufficient annually to deplete it by age 90, in comparison with leaving all of it till age 90. I discovered that in each circumstances, utilizing age 83 as your tipping level, you might be higher off not withdrawing extra cash out of your RRIF.
There may be, nonetheless, a bonus if you happen to withdraw cash out of your RRIF and reward it to your kids. I discovered the largest achieve, as measured by the entire wealth switch to your kids, got here if you withdrew every thing out of your RRIF in a single shot reasonably than depleting it over seven years. In fact, the entire achieve will depend upon what and the way your kids make investments the cash.
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Have you considered charitable contributions? Together with extra RRIF withdrawals, or by itself, you would donate a few of your shares with massive capital good points to a charity. By doing this, you keep away from the capital good points tax, thereby providing you with extra money to speculate and a bigger charitable tax credit score.
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Tim, with the belongings you’ve got, I don’t see you escaping the OAS clawback until you maybe withdraw every thing out of your RRIF now and donate all of your non-registered investments to a charity. If it makes you are feeling any higher, it’s the after-tax OAS quantity you aren’t receiving.
Allan Norman, M.Sc., CFP, CIM, gives fee-only licensed monetary planning companies and insurance coverage merchandise by Atlantis Monetary Inc. and gives funding advisory companies by Aligned Capital Companions Inc., which is regulated by the Canadian Funding Regulatory Group. Allan could be reached at alnorman@atlantisfinancial.ca.
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