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By Gigi Suhanic
National Post
FP Money
Saturday, December 27, 2003
Question: My father has a registered retirement income fund with a total current value of about $200,000. He collects a $50,000 pension from the government as his only source of income. Every year he is taxed at the 50% tax bracket on the RRIF money that he must take out each year. Is there another tax-sheltered entity my father can transfer his money to that would be more efficient?
Answer: The good news is, you're almost certainly wrong about the 50% tax rate. Adrian Mastracci, an investment advisor with KCM Wealth Management in Vancouver, notes that the top tax rate has been lowered in most provinces. For example, in Ontario the highest rate is 46.4%.
Secondly, people hit that tax rate at about $105,000 in income. Based on the information you've given, Mr. Mastracci doubts your father comes anywhere near that.
That said, "I always caution people not to make investment decisions strictly based on what tax you pay," Mr. Mastracci says. It's not just the tax benefits that make RRIFs the ideal option for retirees, but their flexibility.
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says,
“I always caution people not to make investment decisions strictly based on what tax you pay.”
Registered retirement income funds allow people to gradually take out savings that have accumulated, tax-sheltered, in their RRSPs. Once RRIF owners hit the age of 70, they have to start making minimum withdrawals, with the amount rising each year.
Jamie Golombek, vice-president of tax and estate planning, notes that if your father is younger than 70, he could transfer his money back into an RRSP where there is no required minimum withdrawal. If he's 70 or older, then he has to start dipping in to his RRIF.
Based on the RRIF rules for withdrawals, Mr. Golombek says what your father takes out is likely taxed at well under 50%.
If, for example, he is 70 years old now, he will have to withdraw 5%, or $10,000, of his $200,000 RRIF this year.
"The tax on that extra $10,000 is 33% for someone in Ontario with these facts," Mr. Golombek says. If your father is 80, he has to take out 8.5% of the $200,000. The tax rate on that additional $17,000 is 34%.
Still, Mr. Golombek says your question illustrates the misconceptions many people harbour about RRIFs.
"When you're retired, it's time to start paying tax" on the money that was sheltered in your RRSP, he says. "The RRIF is not supposed to be a tax-free inheritance program."
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