At first, you would think having $158,000 of investments would be far better than having $120,000 and your tax-deferral strategy—taking minimum RRIF withdrawals—was the better choice. However, you may be wrong.
When happens to your RRIF when you die
When you die, unless you leave your RRIF to your spouse, the full balance is taxable on your final tax return as income. If you die in January, your other sources of income could be modest. If you die in December, your estate will owe more tax.
In our hypothetical 80-year-old woman’s case, dying at age 90 could result in about $40,000 to $50,000 of tax payable on her RRIF, if she took only the minimum withdrawals. It would depend what time of year she died, what deductions or credits might be available, and so on. But whether she takes the minimum RRIF withdrawals or takes additional withdrawals and contributes the extra to a TFSA, the after-tax value of the investments could be roughly $120,000.
In a case like yours, Anne, if your income primarily comes from government pensions, and your RRIF is your primary asset other than potentially your home, there may not be a compelling difference between the two withdrawal strategies. If someone had a substantial RRIF, a higher income, or was younger and had more years to use low tax brackets, there may be an estate advantage to taking extra RRIF withdrawals.
Who to ask for advice—and what to ask
My mother became terminally ill in her 60s, Anne, and we knew her life expectancy was shortened. We strategically took extra RRIF withdrawals over a couple of years to try to minimize the tax payable on her estate.
The point of minimizing tax and RRIF withdrawals? A tax and estate strategy that includes extra RRIF withdrawals is situation-specific and depends on the fact pattern. But I am in favour of at least considering it.
If your financial advisor or accountant have not raised this concept with you, that does not mean they have not crunched the numbers for you, Anne. But it may be worth asking the question: Will extra RRIF withdrawals mean less taxes on my estate? Ask because most financial advisors focus on investments and most accountants focus on doing your tax return for the previous year. Lawyers who prepare wills may simply accept instructions from you as opposed to considering the tax implications of your estate plan. This is by no means a knock on any of those professionals, but you need to understand the limitations of any advice and ask the right questions.
If you manage your own investments or do your own tax returns, that means you are tasked with considering broader tax and estate considerations on your own as well.