Couple Considers RRSP Cash-Out to Boost Retirement Benefits

A couple from Moncton is weighing the financial implications of cashing in their registered retirement savings plans (RRSPs) to enhance their retirement benefits. Elise and Ron, both aged 62, have faced significant financial challenges due to a serious cancer diagnosis in 2014. Now, as they prepare for retirement in 2028, they are exploring ways to maximize their Old Age Security (OAS) and Guaranteed Income Supplement (GIS) payments.

Elise and Ron currently have a combined income of approximately $14,400 annually from the Canada Pension Plan (CPP), with Ron expecting about $8,000 and Elise approximately $6,400. The couple has no additional retirement income sources and is considering withdrawing funds from Ron’s RRSP, which totals around $125,000. Their goal is to pay taxes on these withdrawals now to qualify for GIS benefits when they retire.

This strategy involves transferring the after-tax amount from the RRSP into tax-free savings accounts (TFSAs). With Ron’s expected annual employment income of $50,000 for the years 2022 to 2024 and Elise’s part-time income of $8,000, they believe they can manage their expenses while gradually depleting the RRSP.

By drawing from their CPP, OAS, and the anticipated GIS—calculated based on their combined CPP income—they plan to withdraw approximately $5,000 annually from their TFSA funds, which they will build up from the RRSP transfers. Additionally, they project selling their home for an equity of $250,000 when Ron turns 71 and expect an inheritance of $80,000 by 2030.

Financial Planning Recommendations

Financial advisor Allan Norman, M.Sc., CFP, CIM, from Atlantis Financial Inc., offers insights into the couple’s situation. He suggests that while their current strategy is sound, it is crucial not to focus solely on one approach. He encourages a broader view to identify potentially more advantageous solutions.

Norman outlines four strategies for managing their RRSPs:

1. **Do nothing now** and draw on the RRSPs as needed at age 65.
2. **Deplete the RRSP** by the time they turn 65 and transfer the proceeds to their TFSAs to maximize GIS.
3. **Delay RRSP withdrawals** until age 65, then convert to a registered retirement income fund (RRIF) to split pension income and reduce taxes.
4. **Delay CPP until age 70** to increase the benefit and use RRIF withdrawals to supplement income until then.

Norman’s analysis indicates that the second option—depleting the RRSP by age 64—would result in the lowest taxable income and the highest GIS. This approach aligns with the couple’s financial strategy, as the GIS amount is determined by net income minus OAS, ensuring that any funds withdrawn from a TFSA are not considered taxable income.

According to Norman, the solution with the highest net worth at age 91 involves the highest tax payments, as all taxes are paid in the first few years while Ron is still working. Notably, if the couple chooses to delay their CPP payments, they would incur little to no tax on future RRIF withdrawals due to their low income.

Norman also emphasizes the importance of considering future cash flow changes, particularly regarding housing after selling their home. This could influence their financial strategy and warrant a reevaluation of their plans.

Conclusion

As Elise and Ron navigate their financial options, they are encouraged to weigh various strategies carefully. With their health and financial stability in mind, they aim for a comfortable retirement that allows them to enjoy the years ahead without the burden of financial strain. Norman wishes them well, hoping they remain cancer-free and find joy in their retirement years.

For further personalized advice, they can reach out to financial planning professionals like Norman, who can offer tailored solutions to meet their unique needs.