Q&A: Tax-free RRSP Withdrawals

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A reader believes he and his wife can take $21,000 out of their RRSPs each year and pay no tax. Is he right?

Q – I have an RRSP redemption question. I plan to retire at 57. My wife is nine months older and will also retire. I have a pension that along with CPP and OAS will give us a comfortable retirement. We also have $200,000 in RRSPs along with $310,000 in cash and TFSAs.

If one of us withdraws $21,000 a year from our RRSPs and we tap our savings for another $21,000 a year, we will pay no income tax and live comfortably. I am assuming our working investments will keep pace with inflation. When we are 65 we will still have a cushion and will have paid no income tax from ages 57-64.

Can you notice any flaws or errors of judgment in this scenario? Any sage or common sense advice? – John S.

A – Congratulations on being able to retire so young with adequate financial resources. However, I have some problems with your math. You say that when you retire, you will receive a pension. That income is, of course, taxable. You also indicate you have investments, presumably made with your cash reserves, which will hopefully generate income in the form of interest and/or dividends. On top of that, you want to withdraw $21,000 a year from RRSPs. That is also taxable.

The basic personal amount for each individual is $11,138 for the 2014 tax year. So if you had no other income, you could each withdraw that amount from your respective RRSPs (total $22,276) and pay no tax. But with the pension and the investment income added on, I see no way to avoid paying at least some tax.

If you want to keep the tax to a minimum, leave the money in the RRSPs and draw from your TFSAs and cash accounts. – G.P.


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