A Tale of Tax Strategies: Unraveling the RRIF Mystery
Beth, a concerned daughter, sought my advice regarding her mother Susan's financial situation. Susan, at 80 years old and a widow, resides in a retirement home, with an annual post-tax expenditure of $60,000. Her health is on a downward trajectory, and sadly, she is not expected to live beyond 85.
Susan's financial portfolio is substantial, comprising $1.2 million in a RRIF (Registered Retirement Income Fund), $300,000 in a TFSA (Tax-Free Savings Account), and another $1.2 million in a taxable account from the sale of her family home. Her investments are primarily in individual Canadian dividend-paying stocks, with minimal cash or bond holdings.
In addition to these assets, Susan receives a modest income stream. She collects a $20,000 survivor pension, $10,000 from CPP (Canada Pension Plan), and her OAS (Old Age Security) is fully subject to the clawback provision.
Three years ago, Beth's accountant raised concerns about the size of Susan's RRIF, warning of a potential large tax bill upon her passing. Acting on this advice, Beth instructed Susan's advisor to increase RRIF withdrawals significantly, well beyond the minimum requirement.
The strategy appeared reasonable on the surface: withdraw funds now, pay some tax, and reduce the risk of a substantial tax burden later. However, the outcome was two tax returns showing approximately $290,000 of taxable income annually. Most of this came from RRIF withdrawals, layered on top of her pension income and about $50,000 of taxable dividends.
Here's where it gets controversial: a substantial portion of these extra RRIF withdrawals was taxed at Ontario's highest marginal rate of 53.53%, with another significant chunk taxed between 48% and 49%. This begs the question: if the aim is to avoid high tax on RRIF funds in the estate, why are we willingly paying the highest possible tax rates now, only to move the post-tax dollars into a fully taxable account?
This is where the logic often falters. RRSPs (Registered Retirement Savings Plans) and RRIFs remain powerful tax shelters, even in one's later years. When you withdraw extra funds from a RRIF, you trigger tax at potentially very high marginal rates, moving your money into a taxable account where dividends, interest, and capital gains are taxed along the way. This ongoing tax drag quietly erodes your wealth over time.
At 80 years old, the RRIF minimum withdrawal rate is 6.82%, amounting to approximately $81,840 on Susan's RRIF. This amount comfortably covers her spending, pays her taxes, and funds her TFSA. There was no need for excessive withdrawals, and no reason to push more money into the taxable account. More importantly, it allowed more of Susan's capital to remain within the RRIF, compounding without annual tax interference.
When we compared the two approaches - aggressive RRIF withdrawals versus sticking to the minimum - the results surprised Beth. The minimum withdrawal strategy leaves a larger RRIF balance at death, resulting in a higher tax bill on the final return. But it also leaves more after-tax wealth overall.
The metrics speak for themselves: by paying less tax during Susan's lifetime and preserving the RRIF's tax shelter, her estate ends up larger even after settling the terminal tax. This is a common oversight. People focus on the tax bill at death and overlook the tax paid throughout their lives. Withdrawing money from a RRIF at top marginal rates just to avoid future tax often shifts the problem rather than solving it, and usually exacerbates it.
Remember the three key principles of smart tax planning: deduct, divide, and defer. Susan is beyond the deducting stage, and sadly, she has lost the ability to divide her income through splitting. But the third principle, defer, remains an effective tool in her financial toolkit. RRIFs are not the issue; paying high tax now to avoid high tax later usually makes matters worse.
Sometimes, the right answer is the most unconventional and mundane. Take the RRIF minimum and leave the rest untouched. This approach may not be exciting, but it is often the most prudent.
In other news, Lindsay and I are officially on Christmas holidays, reflecting on an incredible year for our business and looking forward to a well-deserved break for the remainder of the month. Our kids have one more week of school, so we'll use the upcoming week to finish our last-minute shopping and prepare for the holidays.
Last week, I shared my op-ed in the Globe & Mail about RRIF minimums and the challenges faced by single seniors. Thank you for your thoughtful comments. Here are some additional resources to consider:
- Eight tips to stop worrying about running out of money in retirement
- The social and financial benefits of part-time work in retirement, but beware of clawbacks
- Nick Maggiulli's favorite investment writing of 2025
- Michael James on Money's simple graphic explaining investing in alternatives
- Ben Carlson's guide to becoming a moderate millionaire ($1M to $5M in assets)
- Ben Felix's review of the main lessons from 'The Wealthy Barber' (2025), and why it's an excellent introduction to personal finance
- Heather and Doug Boneparth's thoughts on what to do when you receive a bonus
- Barry Choi's take on how airport lounges have become just another crowded space
Have a wonderful weekend, everyone!
