Taking out RRSPs Tax free with the Pension Income Tax credit

The challenge

He had built up all his retirement savings in RRSPs with only a little bit invested in his TFSA.

This worked great during his high earning years because of the large tax refund but when it comes to retirement, these RRSPs will be withdrawn to fund his retirement and will be 100% taxable. He is also going to be receiving CPP and OAS along with his RRSP income in retirement pushing his retirement taxes higher and risking his OAS being clawed back.

How could we ensure the most advantageous taxation situation for him to begin drawing from his RRSP accounts?

The solution

One strategy to help this client reallocate some of his RRSPs to TFSAs without triggering taxes is utilizing the pension income tax credit. 

Since he meets the minimum age limit of 65, and even though he doesn’t have a pension at work and is still planning on working for few more years, we could still take advantage of this tax planning strategy. 

The simple explanation of how the pension income tax credit works: you can take out $2,000 from your Registered Retirement Income Fund, Locked in Retirement Fund or Defined Benefit Pension and not be taxed on that $2,000 because the credit removes the tax associated to that $2,000 withdrawal.

The result

Why would he want to use this credit if he hasn’t retired yet and is still working? 

Since he is at the eligible age, we can move over some of his RRSP into a RRIF and withdraw $2,000 a year from this RRIF without being taxed on that amount. This also leaves his RRSP intact so he can continue his RRSP contributions for the tax refund until he retires.

Now that he has the $2,000 from his RRIF, he can deposit it into his Tax Free Savings Account or Non Registered Investment Account to help build up tax free growth and tax free income that won’t negatively impact his retirement tax rate or risk clawing back his OAS amount. 

This can also be implemented for a spouse who has retirement savings and meets the criteria.

*The above-scenario is for illustrative purposes only, and is not investment advice. Please consult your advisor to properly use the pension tax credit, there are rules on how much, when you can withdraw, at what age and from certain types of accounts only.