Murray and Veronica plan to retire in three years and travel, spending winters in Portugal and Spain.Christopher Katsarov/The Globe and Mail
Murray is 57 and Veronica is 53. They’re both in sales, earning a combined $280,000 a year including substantial bonuses. While neither has a defined benefit pension plan, they both have group RRSPs at work.
They’re a blended family, with five children ranging in age from 18 to 34. The youngest is still in university. They have a mortgage-free home in Southern Ontario.
Short term, they want to replenish Murray’s tax-free savings account and pay for the youngest child’s university expenses. They plan to retire in three years and travel, spending winters in Portugal and Spain.
They wonder how to “melt down” their registered retirement savings plans – “how much to withdraw and for how long,” Murray writes in an e-mail. Should Veronica – a dual Canadian and U.S. citizen – move her U.S. retirement savings plan to Canada? Should she open a TFSA?
Their retirement spending goal is $92,000 a year after tax. “Can we retire now instead of in 2026?” Murray asks.
We asked Andrew Dobson, an advice-only financial planner at Objective Financial Partners Inc. of Markham, Ont., to look at Murray and Veronica’s situation. Mr. Dobson holds the certified financial planner (CFP) and chartered investment manager (CIM) designations.
What the Expert Says
A plausible meltdown strategy could be for Murray to take RRSP withdrawals of $70,000 a year starting at retirement in 2026 until the end of 2032, Mr. Dobson says. That would be about seven years of withdrawals at this level. This strategy is based on the assumption that Murray maxes out his RRSP contributions until 2026.
“This strategy, in conjunction with taking Old Age Security benefits at age 65 and Canada Pension Plan at age 70, will allow for consistency of Murray’s marginal and effective tax rates over his early retirement period,” the planner says. The RRSP/registered retirement income fund balance after the meltdown is estimated to be about $900,000 when Murray’s the age of 66. “After these years of higher withdrawals, Murray would then take RRIF minimum withdrawals based on his age until the account is fully depleted.”
Part of the meltdown strategy would also involve converting Murray’s RRSP and locked-in retirement account (LIRA) to a RRIF and a life income fund (LIF) by the age of 65. This will allow Murray to take advantage of pension income splitting with Veronica and the federal pension income-tax credit.
“Though the meltdown does occur from ages 60 to 66, I still recommend the conversion early as there are other benefits to converting your RRIF prior to age 71; for example, no withholding tax on minimum withdrawals and the fact that most financial institutions waive withdrawal fees on RRIF payments,” Mr. Dobson says.
“Murray could convert his RRSP to a RRIF as soon as he retires, that is before age 65, keeping in mind that if he converts, he cannot reverse the transaction. He will then have to take minimum payments based on his age going forward.”
The meltdown strategy should also help Murray avoid the OAS recovery tax or clawback. Recovery tax starts when taxable income exceeds about $81,000 a year. “If we consider that income splitting for Murray’s accounts is available at age 65, it would make sense to start OAS at age 65 as 50 per cent of any RRIF or LIF income for Murray can be split with Veronica on her tax return,” the planner says.
Lowering his taxable income by income splitting at the age of 65 could lead to OAS recovery tax not being of material concern for Murray’s plan.
A similar meltdown strategy would make sense for Veronica, Mr. Dobson says. “The difference for Veronica is that I would likely consider smaller withdrawals because of a potentially longer time horizon due to the difference in ages and that she is retiring at the same time,” the planner says. “In her case, I would consider lump-sum withdrawals from her RRSP of $40,000 a year from 2026 to 2032.” Starting in 2031, Murray will be eligible for pension income splitting with Veronica. At that time, Veronica can convert her RRSP to RRIF and start taking minimum withdrawals based on her age until the account is fully depleted.
The added consideration for Veronica is that she has U.S. assets. Generally, there are certain restrictions on when funds can be accessed from U.S. retirement accounts. For example, Veronica could likely withdraw from her Roth IRA (individual retirement account) starting at the age of 60 without penalties, and likely without tax, assuming that appropriate tax filings were provided upon exit from the United States.
For the IRA, Veronica could likely withdraw lump sums from this account starting at 63 without penalty. “Generally speaking, you should be able to request lump sum withdrawals from these accounts directly from your brokerage over the phone,” Mr. Dobson says. “It isn’t uncommon for U.S. persons with smaller balances in these accounts to melt them down first.”
“Keep in mind that IRA distributions are in U.S. dollars and could be used as a way to build up U.S. cash for travel or U.S. dollar purchases rather than converting the money by sending it to Canadian accounts,” the planner says.
Mr. Dobson does not recommend repatriation of Veronica’s U.S. savings accounts for several reasons, including the cost involved for tax advice and the transaction costs, the potential usefulness of having U.S. dollars and the near-term need for retirement funds. Instead, when she retires from work, Veronica could start by “melting down” the IRA first, he says. This will remove the complexity of having the foreign account.
Next, he looks at whether Veronica should open a TFSA. The TFSA is often not recommended for American citizens mainly because it is not recognized as a tax-free shelter. Income such as dividends and interest is expected to be reported on U.S. tax returns.
Could Murray and Veronica retire sooner?
They could, but if they do they might have to sell their house or downsize at the ages of 80 to 85 even if they stay on budget, Mr. Dobson says.
Working longer would ensure they continue to contribute to the Canada Pension Plan, which would help maintain their projected pension amounts.
“If you would like to aim to retire earlier, I would consider a smaller or dynamic budget – one that can be reviewed regularly and changed if necessary – to track expenses more carefully,” the planner says. Using an earlier date, he expects their investments to be fully depleted by the time Murray is 89. By then their house would be worth about $2.5-million, indexed to 2.1-per-cent inflation. This could be used as a source of capital via sale, downsizing or leverage. “This could work, but the extra years of employment certainly would help provide a larger buffer for a higher retirement budget,” Mr. Dobson says.
Client Situation
The People: Murray, 57, and Veronica, 53.
The Problem: Can they both retire in 2026 without jeopardizing their retirement lifestyle goals? In which order should they draw down their savings? Can they quit work even sooner?
The Plan: Continuing to work to 2026 is preferable. Draw on RRSPs and locked-in retirement accounts first. Veronica can consider melting down her U.S. retirement savings plan first.
The Payoff: Clarity, simplicity and tax efficiency.
Monthly net income: $12,170.
Assets: Bank accounts $13,000; guaranteed investment certificates $10,000; Veronica’s U.S. retirement savings accounts in Canadian dollars $109,000; Murray’s TFSA $78,000; his RRSP and locked-in retirement account $818,000; her RRSP $614,000; registered education savings plan $25,000; residence $1,300,000. Total: $2.97-million.
Monthly outlays: Property tax $540; water, sewer, garbage $50; home insurance $80; electricity $80; heating $85; maintenance, garden $120; transportation $275; groceries $800; clothing $115; Veronica’s student loan $625; gifts, charity $75; vacation, travel $300; dining, drinks, entertainment $400; personal care $25; club memberships $250; golf $125; pets $100; sports, hobbies $25; subscriptions $30; drugstore $50; phone, TV, internet $220; RRSPs $2,500; replenishing TFSAs $4,200. Total: $11,070.
Liabilities: Veronica’s student loan $90,000 at 3 per cent.
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Some details may be changed to protect the privacy of the persons profiled.
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