High net-worth clients looking to avoid a “tax trap” later in life should consider accelerating the withdrawal schedules from their registered retirement income funds, according to a pair of financial experts.

Both Daryl Diamond, president of Winnipeg-based Diamond Retirement Planning Ltd. , and Daniel Collison, regional director for Investors Group Inc. in Markham, Ont., say the traditional RRIF strategy of taking out the absolute minimum amount every year may lead to the most unenviable situation in retirement — a higher tax bracket.

Registered assets must be converted from an RRSP into a RRIF during the year in which an client turns 71, and the client must receive the first payment no later than the end of the year in which he or she turns 72.

Diamond says the importance of a good RRIF strategy can’t be underestimated because registered plans have become the prime asset-accumulation vehicle for Canadians, while the number of pension plans has declined.

If clients defer withdrawals as much as possible, Diamond warns, they may find they’re obligated to take out a “huge chunk of income” when they reach their early 70s. For example, the minimum withdrawal from a RRIF between ages 71 and 72 is 7.4%.

“If you have $400,000 in there, that’s a pretty big lump in income you have to take out — whether you want to or not,” Diamond says. “Your taxable income may rise.

“Most people aren’t getting the tax break at the top marginal tax bracket,” he adds. “But upon death, many of them will have their RRSPs and RRIFs taxed at the top marginal bracket because of the mass of wealth they have remaining. It’s the reverse of what most people anticipate.”

Collison says that a growing number of baby boomers have hundreds of thousands or even millions of dollars in their RRSP accounts, and many of them are dying with a substantial portion of their savings intact. That leads to a significant tax hit for their estates.

It may make particularly good sense for members of this demographic to deplete their RRIF assets faster than required. If non-registered assets are held in an equity-based portfolio, he says, there’s a good chance the estate will ultimately end up with a higher value.

“They’ll draw down their registered money while they’re alive and leave more of the non-registered money to their estate. The non-registered money is made up of capital,” Collison says. “Only 50% of the capital gains will be included in income, and that will be taxed at their marginal rate.”

New pension-splitting rules could provide money-saving opportunities for people aged 65 and older if they take out additional amounts of RRIF income, Diamond points out. Withdrawals could be split with a lower-income spouse to minimize taxes.

“People could get it out of the fully taxable state that it’s in,” Diamond suggests, “take it into their respective incomes, pay taxes on it and defer after-tax money on a non-registered basis.”


This accelerated withdrawal strategy may pay its biggest dividends when one spouse dies. It’s at that point that the spousal tax-free rollover moves all the RRIF income into the name of the survivor.

“Now the client has twice as much in the RRIF account,” Dia–mond says, “and the minimum withdrawal increases accordingly.”

If advisors tell their clients not to use registered money in their retirement, the clients may be walking into a tax trap in their late 60s and through their 70s, Diamond warns: “They may erode some credits; they may experience a reduction in old-age security. They may take money out and inadvertently end up in a higher bracket than that in which they deducted the money in the first place.”

Heather Hudson, associate portfolio manager and investment executive at ScotiaMcLeod Inc. in Calgary, recommends her clients start thinking of their RRIF income requirements at least five years before they make their first withdrawal.

She likes to look at it in three ways. First, clients can take the income out at the beginning of the year in one lump sum, use it for the following 12 months and pay taxes on it the next April.

Second, they could take it out at the end of the year, having left it to compound tax-free for another 12 months before paying their taxes. Third, they could take it out quarterly.

@page_break@The last option, Hudson says, is primarily for higher-income clients who are paying tax instalments and can use part of the RRIF income to cover those payments.

Hudson doesn’t recommend signing up to receive income on a monthly basis because that makes it more difficult to manage investments: “You can’t keep as much money invested. You have to run more cash to pay it out monthly, and you’re not getting as high a total return on the assets.”

Hudson believes there is a place for equities in RRIF accounts but there’s no set allocation rule. High net-worth clients with multiple sources of income can more easily handle the risk of an equity-heavy portfolio, she says, while clients for whom their RRIF is their sole source of income cannot.

Diamond says most of his clients have 50%-60% of their RRIF assets in equities. He recommends such a mix because they’re trying to preserve their capital while simultaneously addressing the reality they’ll have some increases in personal costs as they get older, such as home renovations, prescription drugs not covered by basic plans and medical treatments outside of the country.

Collison says clients first have to figure out the rates of return they need on their savings before they can determine their asset allocation in their RRIFs. He recommends ignoring most rules of thumb.

“A typical rule is 100 minus your age equals your equity position, or your age equals your fixed-income position,” Collison says. “That makes no sense. It has nothing to do with anything and doesn’t equate to a person’s individual goals.” IE