Q&A: Retirement income

Zoomer | January 4th, 2011

Question: My wife is going to retire in about four years at age 60. She has no pension. I would like to use my RRSP to withdraw money, about $10,000 a year. I will withdraw twice a year, $5,000 each time, so I do not have to pay 20% tax.

At the moment my RRSP is mixed with mutual funds. Do you think I should remove the mutual funds from my RRSP and put the money into a redeemable GIC so I can withdraw my $10,000 each year with no penalty? What do GICs pay at the moment? Or should I put it in a RRIF? – George N.

Gordon Pape answers: There are several points to be dealt with here. First, the tax that you pay on the $10,000 withdrawals will be calculated at your marginal rate. Tax is withheld at the time the money is taken out at rate of 10% up to $5,000 and 20% on withdrawals between $5,001 and $15,000 (except in Quebec, where the rates are higher). However, the withholding is simply a down payment. Your final tax will be assessed when you file your return.

Second, I do not advise switching to a RRIF until you are required to do so by law. Leaving the money in an RRSP gives you more flexibility – you are not required to take out a minimum amount each year and you can continue to make contributions as long as you have earned income and/or carry-forward room. There is no advantage to moving to a RRIF prematurely.

Finally, I cannot provide specific advice as to what to hold in your RRSP. Certainly, redeemable GICs are safer than mutual funds. But you may choke on the rates. Royal Bank, for example, is currently offering only 1.85% on five-year redeemable GICs.

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