At first, you would think that a $158,000 investment would be much better than having $120,000 and that your tax-deferral strategy—taking smaller RRIF withdrawals—was the better choice. However, you could be wrong.
What happens to your RRIF if you die
If you die, unless you leave your RRIF to your spouse, the full balance will be taxed on your final tax return as income. If you die in January, your other sources of income may be modest. If you die in December, your estate will owe more tax.
In our hypothetical case of an 80-year-old woman, dying at age 90 could result in about $40,000 to $50,000 in taxes paid on her RRIF, if she only took a small amount. It will depend on what time of year you died, what deductions or credits may be available, and so on. But whether you take a smaller amount of RRIF withdrawals or withdraw more money and contribute more to a TFSA, the after-tax value of the investment would be about $120,000.
In a situation like yours, Anne, if your income primarily comes from government pensions, and your RRIF is your primary asset outside of your home, there may not be a compelling difference between the two retirement strategies. If someone has a large RRIF, a high salary, or is young and has more years to spend in the lower tax brackets, there may be an estate benefit from taking more RRIF withdrawals.
Who to ask for advice—and what to ask
My mother was terminally ill at the age of 60, Anne, and we knew her life was cut short. We strategically took additional RRIF withdrawals over several years to try to minimize the tax payable on his estate.
The point of tax cuts and RRIF withdrawals? The tax and estate strategy that includes additional RRIF withdrawals is situation-specific and depends on the fact pattern. But I like to at least consider it.
If your financial advisor or accountant hasn’t raised this concept with you, that doesn’t mean they haven’t crunched the numbers, Anne. But it might be worth asking this question: Do more RRIF withdrawals mean lower taxes for my estate? Ask because most financial advisors focus on investments and most accountants focus on doing your last year’s tax return. Solicitors who prepare wills may simply accept instructions from you rather than consider the tax implications of your estate plan. This is by no means a knock on any of those experts, but you need to understand the limitations of any advice and ask the right questions.
If you manage your own investments or prepare your own tax returns, then you are responsible for taking into account the extensive tax and real estate costs on your own.
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