Earlier this year, we wrote about everything you need to know about RRSPs including the RRSP contribution deadline.
As part of our work with clients this year, when discussing the RRSP and any retirement withdrawal strategies, we tend to see some themes emerge. One big theme is:
Can you have too much in your RRSP?
The answer on that is: “it depends”!
Read on in today’s post about that very subject, what some investors consider too much invested in their RRSPs and why.
Can you have too much in your RRSP?
At Cashflows & Portfolios, we believe managing your cashflow leading into retirement and during retirement is critical. To master that, the timing of any RRSP withdrawals can be important although we have long since recognized personal finance is personal. Everyone has different retirement income needs and wants. Some of them could be:
- The desire for a “max spend” / die broke plan to age 100 or so – to enjoy everything earned and saved and live it up (because there is no second chance).
- The desire to “smooth out taxes” – to ensure there is a good balance between desired income and minimal taxation over decades of retirement spending.
- The desire to avoid any dreaded Old Age Security (OAS) clawback if at all possible.
The latter seems to be a big deal to many aspiring early retirees and retirees – maybe rightly so.
You’ll know from our detailed OAS article and everything you need to know about the OAS clawback paradigm that a major tax strategy in retirement is to avoid OAS clawback where possible. One metric on whether or not you have too much of an RRSP/RRIF is if forced RRIF withdrawals during retirement (you need to convert by Dec 31 of the year you turn 71) enter into OAS clawback territory (remember that RRSP/RRIF withdrawals are taxable income).
What is OAS?
OAS is a flat rate pension benefit and is considered one of the basic building blocks or tiers of Canada’s retirement income system.
Provided you meet residency retirements, it is a flat rate monthly benefit that goes to everyone at age 65 or older (you can defer this benefit). Luckily for many Canadians, there is no requirement to stop working in order to receive OAS.
To receive OAS benefits, you must have lived in Canada for at least 10 years after age 18. To get full benefits, you must have lived in Canada for at least 40 years after age 18. Those who can’t meet the 40-year residency requirement get a pro-rated benefit.
OAS is paid to individuals and does not depend on participation in paid employment nor on the income of a spouse or partner.
However, the big kicker when it comes to can you have too much in your RRSP question is:
- OAS is clawed back from individuals whose income exceeds $79,054 (for 2020). Like the rest of our progressive tax system, clawback incomes are adjusted each year for inflation.
Since OAS is counted as taxable income, and high-income seniors don’t really need “income security” then OAS is clawed back in the form of reduced OAS benefits.
If your net world income exceeds the threshold amount, you have to repay part or your entire OAS pension. Part or your entire OAS pension is reduced as a monthly recovery tax.
You must pay the recovery tax if:
- your annual net world income is more than $79,054 (for 2020, in Canadian dollars), and
- you live in a country where the non-resident tax on Canadian pensions is 25% or more.
Naturally, many retirees want to avoid any OAS clawback. OAS is funded from general tax revenues, it is not a contributory plan like CPP is.
That makes OAS a “sacred cow” per se in that as the Government of Canada’s largest pension program, that is provided to seniors, benefits are indexed for inflation; OAS benefits are in fact indexed quarterly – OAS can be a valuable and cherished income stream for any retiree.
Taxes or not – why the RRSP rocks
The RRSP is a kick a$$ retirement account for these two main reasons:
- There is a tax deduction for your contribution, and
- There is tax-deferred growth.
With your tax deduction you can reduce the taxes you pay today.
With tax-deferred growth investments can grow over time without being taxed as long as the money made stays in the account.
For most Canadians, to reap the benefits of this tax-deferred account, they should consider maximizing their RRSP contributions in their highest income-earning years when they have a plan to withdraw RRSP/RRIF monies when they are in their lowest income-earning years (likely retirement). This is because when you take money out of the RRSP you will likely have to pay income tax on the money withdrawn.
Now to the question: Can you have too much in your RRSP?
When it comes to the OAS clawback, absolutely.
However, at Cashflows & Portfolios, we believe having an OAS clawback concern to navigate is an excellent problem to have!!
Instead of a cash flow issue in retirement, you have a tax issue.
In our opinion, having to navigate the tax system with more efficiency in retirement is absolutely a great problem to have, all other things being equal. Assuming you have your health, tax issues really come into play for higher-income earners including those in retirement.
We’ve worked with a few clients this year, who have an objective to avoid OAS clawbacks as much as possible. We don’t blame them and we’ve been happy to help them map out what is possible.
To illustrate this point, see below for an example and real-world work into OAS clawback issues.
Maximum RRSP values to avoid OAS clawback
Given you can have a number of income sources in retirement, the decision about when to draw down your RRSP/RRIF can make a HUGE difference in OAS clawback avoidance. Such decisions need to be coupled with any of the following retirement income sources in particular:
Government Benefits (CPP and OAS)
For some individuals, who have lived and worked in Canada for the better part of their careers, they may receive about $15,000 per person or close to $30,000 per couple from CPP and OAS when combined. That’s a great base for any retirement income needs. In fact, that base could be more if CPP and/or OAS are deferred benefits to age 70.
Make sure you read up on these pillar posts:
What is CPP and how does it work?
What is OAS and how does it work?
Defined Benefit (DB) or Defined Contribution (DC) Pension Benefits
For some individuals, beyond just working and living in Canada, they might have been very fortunate to have participated in and contributed to either a DB or DC pension plan from work. In fact, when it comes to some federal government employees, in particular, some of these workers may expect to receive upwards of 60-70% of pre-retirement income from their DB plan alone!
If you expect a modest let alone a large workplace pension in retirement, the typical tax-efficient recommendation is to build up your TFSA before topping up your RRSP. We agree with this logic and it may be especially true if your spouse/partner also has a workplace pension as well. Lucky you!
Again, if your net world income exceeds the OAS threshold amount ($79,054 for 2020), you have to repay part of your entire OAS pension (15% of every dollar that exceeds the threshold). So, assuming you and/or your spouse/partner want to maximize OAS, you will need to stay under this individual income threshold.
Using our Projections Tools, let’s look at an example of how much money is too much inside your RRSP?
Sally works in the technology sector in Waterloo, Ontario, Canada. She is currently single, and a great saver. Since she is in a higher tax bracket, she realizes the advantages of putting as much as possible in her RRSP.
Here are the details:
- Age: 41
- Province: Ontario
- Salary: $120,000 (increasing with inflation annually)
- RRSP Balance: $200,000 (100% equities pre-retirement; 60% equities/40%fixed income during retirement)
- TFSA Balance: $0
- Non-Registered Balance: $0
- No DB pension
- No Debt
- CPP: Assumed pushed to age 70, assuming she qualifies for 80% of maximum at age 65.
- OAS: Lived 40 years in Canada, so assumed maximum (minus OAS clawback)
- Goal Retirement age: 65
- Goal Retirement Spending: $50,000 after-tax and increasing with inflation annually.
- Inflation rate: 2%
- Cash return: 1.5%
- Fixed income return: 2.5%
- Equity return: 6.5%
As you can see, at 41, she has already done a great job at building her RRSP. With a recent promotion at work, she now has the capacity to max out her RRSP every year until the age of 65. However, is this the best financial move to make? Will she have “too much” RRSP when she retires at 65?
The results of maxing out her RRSP every year ($21.6k/year increasing with inflation):
To start, Sally will be able to easily meet her goal of spending $50k annually (after-tax) starting at age 65. In fact, the projections show that her net worth will continue to grow over time with an after-tax estate value of a whopping $3.9M at age 100 (or $1.2M in today’s dollars) – check out the chart below.
Assuming Sally continues to max out her RRSP every year, at age 65, Sally’s RRSP will grow to approximately $2M at which point withdrawals will start to fund her day-to-day expenses at her desired retirement age. Everything is pretty smooth until she reaches age 72 where her RRSP is forced to be converted to an RRIF (which comes with a set withdrawal schedule).
With such a large RRSP/RRIF balance at age 72, the mandatory withdrawal schedule results in a taxable income that crosses into OAS clawback territory. At age 72, in addition to income tax, over 40% of her OAS is clawed back. By age 100, her total OAS collected will be approximately $458k.
Is there a better way? Yes!
Sally is happy that she can meet her spending goal, but with Sally’s career, she is focused on efficiency and she is wondering if there is any way to reduce the OAS clawback if she were to make changes today?
Since Sally still has a lot of time until retirement, there is one major change she can make that will make a significant long-term difference in the amount of OAS she collects over her lifetime. What change is that? She should consider maxing out her TFSA first, every year until retirement, then putting the rest of her savings towards her RRSP. This will help keep her net worth growing (tax-free) while helping to reduce her RRSP balance (i.e., in a tax-deferred way) when it comes time for RRIF withdrawals.
In addition to reducing OAS clawback, the main benefit of this strategy will result in a much larger final after-tax estate value of $5.77M (vs $3.9M). If a larger estate value is not important, this also means that she can spend much more during retirement using this strategy including money that is tax-free and not income-tested against benefits like OAS.
So how much OAS will Sally collect over her lifetime? With this strategy, she will collect a considerable amount of OAS benefit income: $612k in OAS by age 100. That’s almost 34% more OAS just by making one change to where she puts her savings and investments first.
Can you have too much in your RRSP Summary
Everyone has different retirement income needs and wants. Common questions related to retirement drawdown options seem endless:
- What registered accounts do I draw down first?
- How much income will my investments generate?
- Do I have any idea how long this income might last?
- What amount of taxes will my RRSP withdrawals incur?
- When should I take my workplace pension?
- Is it more beneficial to draw down non-registered money before RRSPs and TFSAs?
- Can I avoid OAS clawbacks?
- And much, much more…
At the end of the day, based on our experiences with clients and looking at our very own portfolios, having a nest egg in your 50s and 60s that forces you to navigate the tax implications of your RRSP/RRIF to avoid any OAS clawback is a great problem to have.
What do you think? Can you have too much money in your RRSP? Is this a good or bad problem to have?
25 thoughts on “Can You Have Too Much in Your RRSP?”
I understand why some people want to avoid OAS clawback but for me it’s a non-issue. If my wife and I are so fortunate to have a nest egg that spins off enough cash via dividends for that to happen – fantastic!
On the RSP front, I contribute every dollar my employer will match. I think I’ll save the remaining room for when I sell the growth stocks (in my non-registered account) to buy more dividend payers so that I can offset some of the capital gains.
I don’t like the idea of my RIF dividends being taxed as income, but protecting some of those capital gains will be worth it.
That’s a great way to look at it James….I mean, my goodness, OAS clawbacks are a GREAT problem to have all other things considered 🙂
What did you do with the RRSP tax deductions in the first solution? Were they spent? It doesn’t look like they were added to the TFSA or non reg. When you switched to TFSA first then RRSP were the tax deductions spent? If so then isn’t she saving more money on an after tax basis in the TFSA solution?
Great questions Allan.
For simplicity, we created a more linear set of RRSP contributions, some or none of the RRSP-generated tax refund could have been contributed. The RRSP was maxed out each year with inflation regardless of where the money came from. So, you had $21,600 going in, then more and more each year. There were $0 TFSA contributions in her working years because Sally was told by a financial advisor to always “max out her RRSP” while working 🙂
What we wanted to show via this post is through maxing out TFSA contributions, first, for any high-income earner, then Sally in this case not only meets her spending goal with ease, but she is also tax-efficient, has way more money to spend during retirement, AND can avoid any dreaded/cherished OAS clawbacks.
In the RRSP first scenario, when Sally is 72, any excess money not spent from RRSP goes from RRSP withdrawals to TFSA and then to non-registered. That’s the most tax-efficient way.
With the TFSA first solution, it is both tax-efficient and a way to have more money in retirement with OAS clawback concerns. Sally’s effective tax is about 20% in her 70s and 80s despite having millions in the bank.
Warning to your readers. I am 66 and currently retired. My spouse is 64 and will be retiring next year. I have deferred both CPP and OAS as as of 2021 we are spending down some RRSP savings (after first converting to RRIF in order to allow for income splitting). We are in the midst of dealing with the potential of future OAS clawback as we currently have sufficient income from other sources and have the enviable option to take steps to mitigate future OAS clawback and/or taxes. The question is which strategy is best, one or the other or both? We can transfer in kind quality dividend growth stocks from our non-registered accounts to our TFSA accounts to avoid the 38% gross-up required to determine Net Income (which is used to determine Level of OAS clawback). This allows us to maximize our TFSA contribution limit. Also by transfer in kind the amount that will take one of us to “Top of Bracket (actual just closer to top of bracket 2). While this will mitigate the coming tax trap starting @ age 72 and beyond it is apparent that these measures should have been started long before either one of us retired. Still trying to determine whether there maybe a better strategy. We are in full agreement with those that say while this is not a fun situation to be in it’s a much better position to be in than the alternative. It’s similar to a quote from a friend that had a very unpleasant reaction to his fist Covid -19 vaccine when I asked him whether he was going to go for his second shot. His response, “absolutely, bad reaction or not it’s still better than the alternative”.
Hi Mark, thanks for your readership. Yes, drawdowns can be a puzzle.
If you are in the midst of dealing with the potential of future OAS clawbacks (again, a good problem to have), then a few options exist although we’d need to “run the math” for you or any other client. If OAS benefits are important, you can:
1. Spend more before age 65/or when taking OAS,
2. Defer OAS to age 70 – as late as possible,
3. Withdraw more from RRSP or other income sources.
We believe transferring in-kind to TFSA, every year, is very tax-smart whether money comes from taxable or RRSP to TFSA.
Feel free to contact us if you’d like to leverage any of our services – we can help run the math per se and look at options including the best drawdown order to help smooth out taxes.
Could you please expand on this comment…”We believe transferring in-kind to TFSA, every year, is very tax-smart whether money comes from taxable or RRSP to TFSA.”
What are the rules around this?
Is a transfer in-kind to a TFSA considered a contribution, therefore limited to the annual amount?
Is this possible for RRIF to TFSA also?
We are at the cusp of moving RRSP to RRIF for my wife primarily for the purpose of pension credit, and drawing down the RRIF in bulk for her while I continue to be employed. Her resulting income will be mostly surplus for us so it will feed into TFSAs and cash wedge.
Would transferring in-kind from RRSP to TFSA make more sense for her/us?
Happy to Jerry.
Unfortunately, you cannot transfer from RRIF to TFSA directly, that we know of!
You can, however, use funds from a RRIF to add to a TFSA as long as you have available TFSA contribution room. One such type of transfer is an “in-kind transfer” – which essentially means “as is.” There’s no selling or buying involved. Just the tax consequences to report RRIF withdrawals as income.
Depending on the RRIF min. withdrawal value or more, the complete TFSA contribution room could be filled up 🙂
We can’t offer direct advice, for many reasons, but we do know many clients withdraw money from their RRSP or RRIF, to fund their TFSA each year. We believe it is “tax-smart” for any income not needed, to fund the TFSA for longevity risk, estate planning, and any extra income needed down the line in a tax-free way.
Hope that helps a bit?!
Time for Sally to start adding to her TFSA and pretty sure if her income remains as it is she will get max CPP , as the threshold is high 50 thousands. If she were to live off the dividends with a 2 million portfolio her income will be over 100.000.
Absolutely Andrew – that TFSA is a gift of an account if used wisely and as long as our government doesn’t change it on us 🙂
Thanks for your readership!
Unfortunately I will have a tax liability in a few yrs. I’ve already got my financial plan from a CFP just a few months ago.
RRSP is $960,000+ and will have to sell a fantastic stock dominating it –in bunches. Am 62 yrs. Also have healthy TSFA and non-registered acct. No debts.
There can be such a thing as a “problem”.
Great article but I believe there are two errors in it.
Forced withdrawals from a RRIF occur in the year you turn 72 (not 71as you stated in the article) if the RRIF was established by converting your RRSP’s in the year you turn 71.
Also RRSP’s have to be converted to RRIF ‘s in the year you turn 71 (not 72 as stated in your article).
Can you confirm these corrections?
Thanks, Roger. Yes, I recall we have wording something like you need to convert by Dec. 31 in the year age 71 and yes, you are spot on – withdrawals don’t need to happen until the following year 🙂 My parents just had to do this a few years back and I can confirm since I walked them through the process. They have have RRIF min. withdrawals set-up.
What is your plan for the RRSP/RRIF?
In thinking about it again, I do have some questions about my wife’s RRSPs.
She just turned 65 this year and applied to collect her OAS.
Her estimated income in 2022 will be: $18000 pension income, taxable amount of dividends from Canadian corporations (grossed up dividends) $88000, interest income $3000 and medical expenses of $10000.
She will suffer some clawback of her OAS due to high income but should retain some of her OAS.
Her RRSP currently has a value of about $1,000,000 (all equities) and the plan is to convert to a RRIF the year she turns 71 (2028) and make the minimum yearly RRIF withdrawals in 2029.
I realize that her OAS will be completely clawed back in 2029 due to her increased income due to RRIF withdrawals.
However does it make sense for her to withdraw money from her RRSP from the age of 65 to 71and let go of trying to keep any OAS payments? Should she take advantage of the lower marginal tax rate she currently has to withdraw from her RRSP mow and give up on reducing the clawback? By taking funds out of her RRSP at a lower tax rate now than when she is 72 (and what amount per year?) will that offset the loss of any OAS via clawback? At the age of 72 she will be in a higher tax bracket and have her OAS entirely clawed back. I believe. Does collecting some OAS between 65 and 71 offset the higher income tax she will pay by being in a higher tax bracket when she turns 72 and begins to make mandatory RRIF withdrawals?
If you have any questions, please contact me.
No questions at this time – you have a what we call a “good problem to have” when it comes to OAS clawbacks.
In short, to avoid OAS clawbacks, a few things to consider between ages 65 to 71.
1. Defer OAS to age 70 – providing time to withdraw more RRSP/RRIF assets before age 70 when OAS kicks in.
2. Income split where you can, ages 65+ using RRIF.
3. Defer other incomes, like CPP, until age 70 WHILE moving out RRSP/RRIF assets.
With a $1M RRSP, you’ll need to be very aggressive now with RRSP/RRIF withdrawals and likely suffer some significant tax spikes because of that. So, likely best smooth-out taxes over time to avoid such tax hits.
So, because it’s all income that is ultimately taxed: collecting some OAS between 65 and 71 (now) won’t quite offset the higher income tax she will pay when she turns 72 – potentially because RRSP/RRIF assets are compounding away for the next few years.
Hope that helps provide some insights!
Glad to see that Sally has met up with CAP to set her straight on a few things to keep her confident about her future.
I am a believe that, if you are financially able to, you should max out the TFSA and RRSP especially when you are young. Nothing like compounding returns. This can change as you age and are more financially secure and can gauge your retirement needs and possible income sources & amounts.
Not sure if this is “legal” and more than most likely not tax beneficial but why not contribute the maximum to the RRSP to get the tax rebate while you are working. And then later in the year withdraw that amount or more if you wish to reduce your RRSP portfolio. That way you get the contribution deduction to put in to the TFSA and still maintain or lower your RRSP value. Any “spare” money can be pumped in to a non-registered investment account tp enhance your income sources.
Contribute at the beginning of the year to get the rebate and withdraw at the end of the year so that you only incur the tax penalty for the last month.
Is it worthwhile?
In most cases, yes an RSP can be too big! I started mine 40 years ago and now , when I am taking money out I am paying tax at an extreme rate. This rate is way higher than when I earned it in most cases. Even taking into consideration that the tax refund was invested all along, it doesn’t cover the tax bill now. Plus RSP withdrawals can cause OAS claw back. Today I would suggest using your TFSA first, fill it up, then use the RSP for retirement savings.
100% Johnny. We love the TFSA first for many, many reasons.
If your income is high, and after your TFSA is maxed out, we have no problem if folks max out their RRSP but higher income earners should consider maxing out both accounts in our opinion.
Starting your RRSP, 40 years ago, seems very smart to us overall.
One thing I’ve never quite understood about RRSPs…Say I had started my career in 1983 earning 25k. I then used an RRSP to defer taxes until 2023. That same 25k (in 1983 dollars) would be equatable to almost 70k (in 2023 dollars) so I would need at least that much in retirement to maintain the same standard of living. So did I spend decades deferring taxes at a lower income until a higher (nominal) income? Isn’t the point of RRSPs the exact opposite (i.e. defer taxes until one has a lower income)?
We see the RRSP having 2 key benefits:
1. Tax-deferred compounding power, and
2. An RRSP-generated tax deduction for any contributions made, today, to support your tax returns.
To point #1 – you don’t want that since ideally, you are contributing $$ to the RRSP when your income is highest and eventually taking $$ out of the RRSP/RRIF when your income is lower. If you are contributing when your income is low and taking money out when your taxable income is high, then you are not optimizing the use of this account 🙂
Having a tax problem in retirement is a good problem to have but it’s not really optimizing the RRSP account very well either 🙂
Great post, thanks guys.
One cannot simply transfer holdings from an RRSP to a TFSA, right? Using RRSP proceeds to fund a TFSA makes sense but I assume holdings would have to be sold, applicable taxes paid and net cash contributed to TFSA? Or am I missing something?
Not that we know of, Chuck, correct – cannot move directly from RRSP to TFSA.
Based on what we know but we haven’t done this yet either:
There is no direct way to transfer funds in a Registered Retirement Savings Plan (RRSP) to a Tax-Free Savings Account (TFSA). In order to contribute funds to a TFSA from an RRSP, you must withdraw the funds and/or plan to deposit in-kind, pay any applicable withholding tax, plus any additional taxes at tax time. You must also have the available contribution room in your TFSA.
The reason being: RRSP withdrawals are generally taxed at source, while TFSAs are not. 🙂
Unlike RRSP where it needs to be collapsed by 71, does RRIF have an age limit as well? Or can you have a RRIF for as long as you live?
Correct. No upper age limit for RRIFs – as old as you get and/or when the money is gone!
There is no minimum age for conversion to a RRIF, but in most cases, there is no advantage gained by converting your RRSP to a RRIF before the year in which you turn age 65, given pension income splitting doesn’t start then – an advantage for couples but not much use for any singles.
RRSP withdrawals are not eligible for pension income splitting or for the pension income tax credit, while RRIF withdrawals are eligible for both, for a taxpayer age 65+. Another advantage for anyone.
Hope that helps!
Very helpful, thanks!