RRIF Holders with a Lower Marginal Tax Rate - Consider Using Your TFSA

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Taxes are, indeed, one of life’s few certainties. Not many people would want to give extra money to the government in the form of taxes! As such, tax minimization opportunities should always be a consideration for investors. Minimizing taxes should not just be thought when tax returns come due each year, but instead over an entire lifetime.


As an example, individuals who delay drawing taxable funds because they do not want to pay the associated taxes today should remember that the value of certain accounts (such as a Registered Retirement Income Fund (RRIF)) is generally included in taxable income at death (subject to possible rollovers to a surviving spouse or common-law partner). When the value of the RRIF and other deemed income amounts that must be included in an individual’s terminal tax return are substantial enough, this often puts individuals in a high marginal tax bracket and results in a larger tax liability in the future than could be paid today.


Here’s one thought on how you can use your Tax-Free Savings Account (TFSA) to potentially be strategic about your overall lifetime tax bill. Remember that you will not have to pay taxes on any amounts withdrawn from a TFSA as contributions are effectively made with after-tax dollars and the income earned is tax free.


If you believe that your marginal tax rate today is substantially lower than you expect in the future, including upon death, consider withdrawing funds in excess of the required minimum annual amounts from an RRIF and putting them into your TFSA (subject to available TFSA contribution room). In doing so, the funds will be taxed at your current (lower) tax rate, instead of at the higher marginal tax rate in the future. Keep in mind that the effect of any income-tested government benefits (such as the Guaranteed Income Supplement, Old Age Security, the age credit, etc.) should be taken into consideration when contemplating this strategy.


At the time of writing, the lifetime contribution limit for the TFSA is $41,000 (for the year 2015). However, the TFSA’s annual contribution limit and federal personal marginal tax brackets and marginal tax rates are subject to change based on the newly elected federal Liberal government’s election platform (the details of which have yet to be announced).


For the TFSA, the annual contribution limit is expected to be reduced from the 2015 limit of $10,000 to $5,500 starting in 2016. With the new government promising to increase the highest marginal tax rate and reduce middle-income tax rates, this strategy may be compelling to certain investors, especially if they have not fully used their lifetime available TFSA contribution room.


This strategy may not be appropriate for every investor, but it is a good reminder for investors that tax strategies should be considered today to potentially reduce an overall lifetime tax bill. A tax professional will be best placed to assist with this strategy or other tax minimization opportunities that relate to your personal situation.


Don’t Forget: The Minimum Withdrawal Factors Have Changed


Remember that the minimum withdrawal factors for the Registered Retirement Income Fund (RRIF) have been reduced for 2015 and later years. As an example, an RRIF holder who is 71 years of age and has RRIF assets valued at $100,000 at the beginning of 2015 would have to withdraw a minimum amount of $5,280 from the RRIF in 2015 (5.28 percent of RRIF assets) compared to the previous minimum amount of $7,380 (7.38 percent of RRIF assets).


If you have withdrawn more than the reduced 2015 minimum amount in 2015, you will be permitted to recontribute any excess amount to the RRIF (up to the amount of the reduction in the minimum withdrawal amount). Note that this must be done before March 1, 2016. The recontribution will be deductible when calculating your income for the 2015 tax year.


Here are the new RRIF withdrawal factors: