Q&A: What to do with RRIF withdrawals?

Question: You have often mentioned that one problem with RRIFs is that the minimum withdrawals keep increasing so you may deplete the RRIF too quickly. However you don’t have to spend it! If you don’t need all the withdrawal to live on why not just accept the withdrawal and re-invest it? Yes, I know you pay tax on the withdrawal but at least the money is now outside the RRIF and you can put it in a tax-advantaged investment. – Tony W.

Gordon Pape answers: Of course you can reinvest the money after withdrawing it. The problem is, you’ll only have part of it to reinvest; the government will have taken the rest in the form of the taxes you paid. Consider the case of someone with a 35% marginal rate who is required by law to withdraw $10,000. The government will collect $3,500, leaving only $6,500 to reinvest. At an average annual compound rate of return of 6%, the $3,500 would grow to $6,268 over the next decade. But it won’t because the government has taken it away. Repeat the same exercise each year and it will add up to a lot of lost capital in a RRIF.

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