Should I transfer my RRIF money to a non-registered plan to avoid OAS clawbacks?

Jamie Golombek, vice-president of taxation and estate planning at AIM Trimark Investments, has the answer.

Jamie Golombek 16 June, 2003 | 1:00PM
Dear Expert:

I am age 65 and retired. With the CPP, OAS and my income from non-registered sources, I do not need any extra cash from an RRSP now or from a RRIF when I turn 69. In order to avoid a clawback of OAS in the later years and to avoid the fact that the government may take 46% of what is left in my RRIF at death, I plan to start to withdraw from my RRSP this year and re-invest in my non-registered plan. I would withdraw money systematically, so that there would be no investments left in my RRIF when I turn 80. I am anticipating I would live beyond age 80, since there is a long life history in my family. In your opinion, is this a viable plan of action?

Expert Answer:

The plan that you suggest is sometimes colloquially referred to as a "RRIF meltdown." It is not inherently a bad idea, but it is generally not necessary for most seniors.

The 2003 OAS clawback begins at approximately $58,000 and is increased annually by the cost of inflation. If you already have other sources of income that will put you above this inflation-adjusted level in five years, when you must begin withdrawing money from your RRIF, you may wish to consider withdrawing money in advance.

Whether or not this is a wise strategy depends on your tax rates and the rate you expect to earn on your money. By withdrawing the funds from your RRSP today, you are paying tax immediately on the amount withdrawn. If this amount had stayed inside a registered plan and had been able to compound for a period of five years or more, depending on the type of investment and the rate of return, you may have achieved a higher compounded pre-tax rate of return than the amount of potential OAS clawback that you would be subject to in five years' time.

I would recommend sitting down with a financial advisor and running the numbers to see whether withdrawing money out of an RRSP and RRIF and paying tax now is better than deferring the withdrawal and potentially suffering OAS clawbacks.

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Jamie Golombek

Jamie Golombek