Q&A: Reduced life expectancy

Question: If I withdraw money from a locked-in RRSP because of reduced life expectancy is my tax rate the same? Is there a better way to withdraw this money which results in lower tax rate such as limited partnerships? – Brian F.

Gordon Pape answers: There is no tax rate reduction for the circumstances you mention, or for any other reason. All withdrawals from RRSPs, RRIFs, etc. are treated as ordinary income and taxed at your marginal rate. There are no exceptions.

Some financial planners claim there are ways to reduce the tax on registered plan withdrawals but what these schemes all boil down to is creating offsetting tax deductions in some other way. For example, you mention a limited partnership (LP) so I suspect someone has suggested buying units in an LP with the proceeds from the RRSP withdrawal and using the LP tax deduction to offset the RRSP tax payable. Sure it works in the sense the net tax paid may end up being zero. But the reality is that you will still be taxed on the RRSP and by putting the money into an LP to offset that tax you may be taking on a highly risky investment.

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