Q&A: Needs a car

Question: I am 71 and receive a small income of about $7,200 a year from my RRIFs, which have experienced zero or negative growth every year for the past five years. At the moment their total cash value is about $123,000. My 12-year old car has just given up the ghost but in order to finance a good used car I have to either borrow the money, which would be difficult for me to re-pay, or cash in $13,000 from my RRIF.

It is my understanding that when I die my estate will have to pay tax on the remainder of my RRIF at a marginal rate of close to 50 per cent. Right now the marginal rate I will have to pay is 30 per cent. Am I compromising my future income terribly by taking the money out now? I don’t intend to take any more out. If I take this out this year, will this reduce the amount I have to take out each year going forward? – Anne S.

Gordon Pape answers: You are caught between the proverbial rock and hard place. You need a car but don’t want to borrow to buy one (I don’t blame you). So the RRIF becomes the piggy bank.

You say you need to withdraw $13,000 for the car. Have you taken taxes into account? In your bracket you will only be left with $9,100 once the government takes its cut. Will that be enough for the car you want?

To clarify your question about taxes on the RRIF when you die, there is no fixed rate. The money in the plan will be taxed at your marginal rate, assuming there is no spouse. Since this is a relatively small RRIF, it is unlikely your estate will pay the highest rate.

Yes, your future income will be reduced. If you take out $13,000, you will be left with $110,000 in the plan. Your minimum withdrawal rate next year at age 72 will be 7.48 per cent. With $123,000 in the plan, that works out to $9,200. If you take out $13,000, the minimum withdrawal will be $8,228, almost $1,000 less.

Do you have a money question you’d like to ask Gordon? Send it along and then check out our Q&A section regularly to see if it was chosen for a response. Sorry, we cannot send personal answers.