Personal Finance

Taking out RRSP below personal exemption

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  • Feb 29th, 2016 11:52 am
Member
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Sep 26, 2012
332 posts
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Edmonton

Taking out RRSP below personal exemption

I suggested to my wife that she should start cashing out her rrsp and open a tfsa account. She has almost no income while she is staying home to raise our kids. She is well below her personal income tax exemption and I think would pay no taxes moving her rrsp into a tfsa. I know the bank is required to withhold a percentage, but she should get it back with her tax return this year. The tfsa is not counted as income at retirement, and might keep her taxable income lower during retirement. Am I missing something? Illegal? Any ideas?
9 replies
Deal Addict
Mar 3, 2009
1913 posts
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Ottawa, ON
DrPoopee79 wrote: I know the bank is required to withhold a percentage, but she should get it back with her tax return this year.
If she withdraws this year, then the money counts as income for the 2016 income tax year. Assuming she is below the personal exemption limit for 2016, then she will get it back when she files in 2017.
Deal Addict
Mar 28, 2010
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GTA
If it matters, she will also lose that RRSP contribution room forever. It's not like the TFSA where it will come back the next year.
Member
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Sep 26, 2012
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Edmonton
Thanks, for some reason I thought she had to do it before the RRSP deadline on Monday. If I did a spousal RRSP contribution before Monday, does that through a wrench in this idea? She could then pull the money out as her income. Not really the plan, only if our situation gets worse, with the economy here in Alberta -quasi-income splitting? I read on Garth Turners blog it has to be untouched for 3 years, and/or there may be other implications, unsure what. The RRSP she has now has been untouched for over 3 years.
Deal Addict
Mar 8, 2013
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what is her RRSP invested in? Unless you need the money now, it probably makes sense to wait until December to earn more interest and look at your tax situation at that time. You wouldn't want the extra income to affect other tax credits, etc. On the other hand, if the RRSP is in savings and you plan to invest in savings anyway, if she opens a non-TFSA account at EQ Bank at 3%, she probably will do better than elsewhere with a TFSA. Just make sure that it is clear that the money is hers - ie from the RRSP to an account for which she is the primary holder (chequing if you do indeed go to EQ)
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Nov 19, 2004
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Cambridge, ON
Spousal RRSP would likely be something to look at in your situation. That way 3 years later she can take the money out and it can be taxed at her rate.

The RRSP deadline is for contributing, not withdrawing. Any contributions by Monday could be applied to the 2015 tax year. But any withdrawals now will count towards 2016.
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Dec 14, 2007
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DrPoopee79 wrote: Thanks, for some reason I thought she had to do it before the RRSP deadline on Monday. If I did a spousal RRSP contribution before Monday, does that through a wrench in this idea? She could then pull the money out as her income. Not really the plan, only if our situation gets worse, with the economy here in Alberta -quasi-income splitting? I read on Garth Turners blog it has to be untouched for 3 years, and/or there may be other implications, unsure what. The RRSP she has now has been untouched for over 3 years.
It is completely legal and a valid way to shift income to use the SRRSP in this way.

BE CAREFUL about the attribution rules. The RRSP she has... is that a Spousal RRSP? If so, DO NOT CONTRIBUTE TO IT if you plan on taking it out this year. If you don't need the money immediately, then withdraw near the end of the year. 20% will be withheld ( 30% over $15,000 ). Yes, she WILL some back ( assuming she's not owing taxes ) when you file your taxes in Spring 2017.

Scenario:

Wife has $40,000 in Spousal RRSP. Last deposit ( to any spousal RRSP ) was Oct 2013.

Earliest you can Withdraw is Jan 2016. Earliest you can start contributing again is 3 calendar years ( Jan 2017 ).

If she withdraws $30000 in 2016, it will be considered HER 2016 income. 30% ( $9000 would be withheld ).

Tax owing for $30,000 income would be about $5200 total, so she'll receive $3800 back. So, she could add $21,000 + $3800 into a TFSA which will grow tax free. Essentially, she's converted $30,000 of taxable money into $25,000 of non-taxable money.

NOTE: If you contribute ( before Feb 28, 2017 ) to the SRRSP you can still count it as a deduction for 2016, if you need to offset tax owed, but usually due to a high 30% withholding tax, you won't need to.
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Jul 15, 2009
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DrPoopee79 wrote: I suggested to my wife that she should start cashing out her rrsp and open a tfsa account. She has almost no income while she is staying home to raise our kids. She is well below her personal income tax exemption and I think would pay no taxes moving her rrsp into a tfsa. I know the bank is required to withhold a percentage, but she should get it back with her tax return this year. The tfsa is not counted as income at retirement, and might keep her taxable income lower during retirement. Am I missing something? Illegal? Any ideas?
Note that the final tax payable on this withdrawal will not be 0%, but it will be the lowest federal+lowest provincial tax bracket. This is because she is your spouse. The amount will be deducted from your spousal amount. Her tax on the withdrawal will be 0, but your taxes will go up by the amount of the withdrawal at the lowest tax bracket.

If she were single or if your income were also below the personal exemption, then the withdrawal really would be tax-free.
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Dec 14, 2007
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bubak wrote: Note that the final tax payable on this withdrawal will not be 0%, but it will be the lowest federal+lowest provincial tax bracket. This is because she is your spouse. The amount will be deducted from your spousal amount. Her tax on the withdrawal will be 0, but your taxes will go up by the amount of the withdrawal at the lowest tax bracket.

If she were single or if your income were also below the personal exemption, then the withdrawal really would be tax-free.
To be precise, his taxes do not go up, but the amount of rebate the family gets back is lower as LESS of the non-refundable tax-credit gets returned.

In REAL terms, what that means is that you can think of anything she earns or withdraws as income is sort of like paying 15% tax on that amount, but I wouldn't sweat it too much.

The spousal credit is basically like throwing a $1500 bone the way of single-income families. It's not income-splitting ( which we kind of had for 1 year ) but it's a nice little bonus for those supporting a spouse. Every dollar she earns take 15¢ away from that bonus.
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Aug 2, 2010
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Here 'n There
DrPoopee79 wrote: I suggested to my wife that she should start cashing out her rrsp and open a tfsa account. She has almost no income while she is staying home to raise our kids. She is well below her personal income tax exemption and I think would pay no taxes moving her rrsp into a tfsa. I know the bank is required to withhold a percentage, but she should get it back with her tax return this year. The tfsa is not counted as income at retirement, and might keep her taxable income lower during retirement. Am I missing something? Illegal? Any ideas?
It's a good idea as she is never going to get a lower tax rate than zero. Losing RRSP contribution room as someone cautioned is totally irrelevant. Under $5K the tax withheld is 10%, up to $15K its 20% and over that it's 30%. If you withdraw <$5K each time then some institutions only take off 10% each time so that would be a way of getting more $ but they really are supposed to base it on the total amount withdrawn so far in the calendar year. Of course you'll pay whatever tax you owe next year anyway, but as a cash flow item better to have the money sitting in your pocket than the CRA's until the tax is actually settled.

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