Q&A: Early RRSP withdrawals?

Question: I have recently spoken with my banker who advises that we withdraw our
RRSP annually, so as to avoid RRIF withdrawals that place our tax burden too high.
We will have a healthy income from our pension plan, and had not thought about
touching our RRSPs. What do you think? – Jane A.

Gordon Pape answers: That advice only makes sense if you are
in a lower tax bracket now than you will be after you retire. Both RRSP withdrawals
and RRIF withdrawals are treated the same way for tax purposes. If you are still
working, you probably have more income (and therefore are in a higher tax bracket)
today than you will in future.

Ask the banker to run some financial projections to prove his case. Make sure
the numbers are based on reasonable assumptions. That will help you make a more
informed decision.

Oh yes, don’t lose sight of the fact that by making RRSP withdrawals now you
lose the benefit of tax-sheltered compounding for the period until you need
to convert to a RRIF. That could be several years.

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