As we age, our money needs change as well. In our ‘Ask the Expert’ series, we invited our readers to send in questions. The questions are screened, and anonymised. Today, we are focused on questions from older readers. Our expert is Jason Heath. He is a certified financial planner, and a fee-only advisor and managing director at Objective Financial Partners.
Questions: I have a mix of stocks and bonds in my retirement account. Should I change my RRSP investments as I get older?
Answer: It is a common recommendation that you should reduce your exposure to stocks as you get older. In some cases, this makes sense, while in others, it does not.
One case when it makes sense is if you are going to be drawing down your RRSP heavily in the early years of retirement, especially for someone who is considering deferring their Canada Pension Plan (CPP) and Old Age Security (OAS) pensions to age 70. If the time horizon for your RRSP withdrawals is short, or you are taking more significant early withdrawals, having a lower exposure to stocks reduces the risk of a stock market downturn early in retirement.
Another reason to reduce exposure to stocks is if you are building up savings in Tax Free Savings Accounts (TFSAs) or taxable investment accounts. Ideally, if you have a choice, you want to grow your tax free and after-tax accounts by investing in stocks, as opposed to growing your tax deferred RRSP that will be subject to tax on withdrawals.
In a scenario like this, it may make sense to shift your RRSP more to bonds and hold more stocks in non-RRSP accounts. On the other hand, some investors become more comfortable with risk as they age, and as their investing knowledge develops. As a result, an investor in their 50s may have a much higher risk tolerance than they had in their 30s when they did not really understand how stock markets worked.
Risk tolerance should be a primary determinant of investment asset allocation at any age or stage, with tax and other factors as secondary considerations. In summary, should your RRSP investments change as you get older – maybe!
Question: I work as a teacher and have a pension. Do I still need to get myself an RRSP?
Answer: If you have a generous defined benefit (DB) pension, you may not “need” a RRSP, as your pension may adequately provide your retirement income. That said, there are other considerations.
When you are a pension plan member, you have an annual pension adjustment on your T4 slip that reduces your RRSP room for the subsequent year. It is common for a pension plan member to receive as little as $600 of new RRSP room each year. So, even if you want to contribute to a RRSP, as a pension plan member, you may have little ability to contribute.
If you have the extra cash flow and can afford to contribute to your RRSP, whether you need to or not, you may “choose” to contribute. If your income is high, and your income will be lower in retirement – including if you can split your pension and RRSP/RRIF withdrawals with a lower income spouse – you may “want” to contribute to a RRSP.
On the other hand, if your pension will comfortably provide for your retirement, especially if your risk tolerance is low, you may opt to focus on debt repayment instead of investing. Another alternative to a RRSP is a TFSA, which can be used for many purposes at different ages, including saving for retirement.
Question: I am almost in retirement or will be in a few months. What is the most tax efficient way to get money out of RRSPs?
Answer: There is not really a single answer to this question. You can withdraw money tax free under the Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP) to buy an eligible home or pay for post-secondary education. Otherwise, withdrawals are considered taxable income.
Ideally, you should contribute to a RRSP in a high-income year and withdraw in a low income year. Most people’s incomes are lower in retirement. RRSP withdrawals can be deferred until age 72, but it is often advantageous to consider withdrawals earlier, especially if someone retires well before 72. It may be reasonable to take RRSP withdrawals in your 50s or 60s, especially if is done while deferring pension income like workplace pensions, Canada Pension Plan (CPP), or Old Age Security (OAS).
The ability to split Registered Retirement Income Fund (RRIF) withdrawals after age 65 with a spouse or common-law partner means converting a RRSP to a RRIF may make sense. RRIF withdrawals also qualify for a pension income amount tax credit after 65 that may reduce some or all of the tax payable on a $2,000 RRIF withdrawal (but not a RRSP withdrawal).
Finally, dying with a large RRSP or RRIF can be very taxing, as the whole amount is taxable on your final tax return unless you leave the account to your spouse or in some cases, a financially dependent child or grandchild. As a result, it can be advantageous to take withdrawals from your RRSP or RRIF before age 72 or withdraw more than the government mandated annual minimum. Sometimes the way in which you withdraw money from a RRSP is as important as the timing in order to reduce tax payable.
Question: Are there any conditions, rules or limits for withdrawing from an RRSP?
Answer: You can withdraw money tax free under the Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP) to buy an eligible home or pay for post-secondary education. Regular RRSPs have no practical restrictions on withdrawals. The withdrawals are taxable, so caution should be taken when considering withdrawals during your working years and planning to maximize retirement income and minimize tax is important in retirement.
Spousal RRSPs have some restrictions. A spousal RRSP allows one spouse to contribute to a RRSP and claim a deduction on their own tax return, but the account is owned by their spouse. Withdrawals can be taxed to the non-contributing owner of the spousal RRSP, but there is a catch. Withdrawals within 3 years of a spousal contribution by the contributing spouse can be taxed back to the contributor instead of the spousal RRSP owner.
Locked-in retirement accounts that come from a defined benefit (DB) or defined contribution (DC) pension plan have limits on withdrawals. You cannot typically take a withdrawal prior to age 55 and there are annual maximum withdrawals that do not apply to a regular RRSP. Locked-in accounts may have exceptions in situations like extreme financial hardship, shortened life expectancy, or if the balance is low, and these rules depend on province of residence.
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