It is sensible to ask the query, however watch out no matter you do does not wind up costing more cash in the long term
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By Julie Cazzin with Allan Norman
Q: My spouse and I are 83 and 80, respectively, and I’m dropping my Previous Age Safety (OAS) as a consequence of dividends and my registered retirement earnings fund (RRIF) withdrawals. I want once I was youthful that somebody had informed me dividends may very well be an issue as a retiree. I’m considering of cashing out my RRIF this 12 months and cashing in my shares for index funds so I can gather my OAS pension. Does this make sense? Our tax-free financial savings accounts (TFSAs) are maximized, I’ve $600,000 in RRIFs in addition to a pension of $45,000 per 12 months, and my spouse has $490,000 in a RIFF. We’ve non-registered investments of about $3.5 million with a dividend yield of about 3.2 per cent, and a small rental in my spouse’s title with an earnings of $9,000 per 12 months. — Tim
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FP Solutions: You’re in a great place, Tim, and it’s sensible to consider find out how to decrease your taxable earnings to scale back OAS clawbacks, which apply in case your web earnings exceeds $90,997 in 2024. And you’ll have to repay 15 per cent of the surplus over this quantity to a most of the overall quantity of OAS acquired. Simply watch out that you simply don’t do one thing that can price you more cash in the long term.
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Don’t beat your self up about dividend investing. If, whenever you had been younger, you had been suggested that future dividends might end in OAS clawbacks, you might not have the cash you might have as we speak. Dividend investing is a relatively straightforward inventory choice technique, making it fashionable with DIY traders. That, plus the truth that worth shares — usually dividend payers — have traditionally outperformed progress shares.
At this time, your shares are producing a gradual circulate of taxable dividends that you’re reporting in your tax return. Nevertheless, you have to report the grossed-up (38 per cent) dividends, not the precise quantity of dividends acquired. For instance, for those who obtain $100,000 in dividends, you report $138,000, which is the quantity used to evaluate OAS clawbacks. After the clawback evaluation, the dividend tax credit score is utilized, bringing down your taxable earnings.
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Dividends are one tax concern in a non-registered account. Capital features, that are the distinction between the e-book and market worth of an asset resembling shares or funding actual property, are the opposite tax concern, and they’re going to additionally influence your OAS eligibility.
The problem with holding particular person shares in a non-registered account is the tax drag (the discount in potential earnings or progress as a consequence of taxes on funding features) created by dividends and capital features when buying and selling shares.
My guess is you’re considering of switching to index funds as a result of they are typically extra tax environment friendly, are longer-term holds and, in response to the SPIVA reviews — which examine returns from lively fairness and fixed-income mutual funds and their benchmarks — usually tend to outperform managed portfolios.
In relation to RRIFs, I usually recommend to folks beginning retirement not to attract greater than wanted except the surplus goes into one other tax shelter resembling a TFSA. The explanation for that is due to the tax drag I described above.
If you happen to draw extra cash out of your RRIF, you pay tax and have much less cash to reinvest. In your case, Tim, that quantities to about 40 per cent much less or much more, relying on the quantity you draw out of your RRIF. You’re additionally topic to the tax drag of dividends and capital features whenever you put money into a non-registered account.
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Having stated that, as you draw nearer to the top of your life, there’s a tipping level when it begins to make sense to attract out of your RRIF and put money into a non-registered account. Within the 12 months of your dying, your marginal tax fee (in Ontario) will likely be 53.53 per cent. If you happen to can draw cash out of your RRIF at a decrease tax fee within the 12 months previous to your dying, that’s higher than leaving all of it to the top when it’s taxed at a better fee.
Similar to the youthful retiree withdrawing extra from their RRIF, you’re nonetheless confronted with much less cash to take a position and a tax drag. The distinction, utilizing the instance above, is that there’s just one 12 months of the tax drag, and for those who had left the cash within the RRIF, just one 12 months for the tax-deferred progress to make up for the bigger tax fee within the ultimate 12 months.
I used to be curious to see what would occur for those who withdrew all of your RRIF cash now at age 83, or sufficient every year to deplete it by age 90, in comparison with leaving all of it till age 90. I discovered that in each instances, utilizing age 83 as your tipping level, you’re higher off not withdrawing extra cash out of your RRIF.
There may be, nevertheless, a bonus for those who withdraw cash out of your RRIF and present it to your kids. I discovered the largest achieve, as measured by the overall wealth switch to your kids, got here whenever you withdrew the whole lot out of your RRIF in a single shot moderately than depleting it over seven years. After all, the overall achieve will depend upon what and the way your kids make investments the cash.
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Have you considered charitable contributions? Together with extra RRIF withdrawals, or by itself, you may donate a few of your shares with giant capital features to a charity. By doing this, you keep away from the capital features tax, thereby supplying you with more cash to take a position and a bigger charitable tax credit score.
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Tim, with the property you might have, I don’t see you escaping the OAS clawback except you maybe withdraw the whole lot out of your RRIF now and donate all of your non-registered investments to a charity. If it makes you are feeling any higher, it’s the after-tax OAS quantity you aren’t receiving.
Allan Norman, M.Sc., CFP, CIM, gives fee-only licensed monetary planning companies and insurance coverage merchandise by way of Atlantis Monetary Inc. and gives funding advisory companies by way of Aligned Capital Companions Inc., which is regulated by the Canadian Funding Regulatory Group. Allan might be reached at alnorman@atlantisfinancial.ca.
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