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Learned Something New

Updated: Jan 14

So, in my last article I had mentioned that we have set up our registered retirement accounts (LIFs & RIFs) to pay tax all year. In, fact in Jan 2022 I had already done this with my LIFs, setting them up to pay the maximums per my age. For this year in 2024, starting January, I have also set up the RIFs to pay more than the annual minimums, and set up for monthly payments. In December, we take a modest lump sum out to make up the difference and meet our income goals for the year.

  In your LIF you can either take the minimums, which are not taxed, or the maximums, which are taxed. In your RIFs there are no maximum limits, and you can set any annual withdrawal amount above the minimums. All planned, annual withdrawals can be set up to pay monthly, bimonthly, quarterly, or annually.

However, the important thing to remember is, if you take annual amounts above the minimums you are allowed by your age, you will pay tax. The tax paid will vary based on the amounts above the minimums and the 3 tiered tax rates set by the CRA.

   For example, if you have $100,000 in a RIF and are 60, you will have to take a minimum of 3.33% out for the year, or $3330. But if you feel this isn’t enough and decide to take $5000 you will pay tax on the difference. If the difference is less that $5000, you will pay 10% on the amount above the minimum, as in this case. Therefore you pay ($5000-3330)*10%=$167 in tax. If you fall inbetween $5000 to $15,000 you will pay 20%, and if you are above $15,000 you will pay 30%. To reiterate, the tax is applied only to the amounts above your age minimums.

   LIFs are slightly different. They have prescribed age minimums and age maximums, and you are not allowed to take more than the age maximums or any amounts between. If you take the minimums, the tax is deferred til tax return time. Taking minimums defers paying tax, however if your income is set up so that tax is unavoidable and significant through the yeear due to other sources of income, this may not be the best plan. Deferring the tax expense til tax time can make the CRA start or increase your tax instalments, if they calculate you owe more than $3,000 at tax time in the following year. Taking only minimums from your LIFs may prevent you from adequately drawing these accounts down, which could adversely affect your future income from CPP and OAS through government clawback rules. For these reasons, it can make better sense to take the maximums, and pay your taxes through the year. This is what I started in Jan 2023 on my LIFs, though this year I have learned another nuance of LIFs I was not aware of, and in researching, could find nothing about it on the internet.

   A little known and poorly explained fact of LIFs, is when you take the maximums, and the yearend value of your account increases from one year to the next, this difference in value is added to your age calculated maximum value. For example, if you are taking maximums, and your account value on Dec 31, 2022 is $90,000, and at the end of the year Dec 31, 2023 it is $100,000, and you still elect to take the maximum payment into 2024, the difference in the previous yearend values is added onto your age calculated maximums for 2024. Again, for example, if you are 60 going into 2024, then the $100,000 is multiplied by your age maximum rate of 6.85%, to arrive at your age annual maximum payment of $6850. However, because you had an increase in your account value over the previous yearend value of $10,000 ($100,000-$90,000), your financial institution will add this onto your regular calculated maximum boosting your annual maximum to $16,850. This changes your age withdrawal rate from 6.85% to $16,850/$100,000 or 16.85%. This amount can be significant in the fact that you are more than likely going to be forced to sell off shares throught the year to fund the new maximum value, as most (stable) investments only pay between 3-7% depending on diversification and other factors. I’ve exaggerated the situation and amounts a bit, but if you made investment gains above your annual maximum withdrawal amounts, and electo take maximums into the following year, this will happen. Long story short, the government has rules that incentivize you to draw these pension accounts down, and you will pay the added tax if you are growing your LIF accounts, either now or later. You can switch to minimums to escape higher taxation, but this may not help you long term unless you actually want these accounts to grow or remain unchanged for future income reasons. There’s no escaping the tax man, and unless you are living on minimum to below minimum wages in your retirement, arguably there is no advantage to defering the tax in these accounts. So, you need to think a bit about whether you want to draw these accounts down quicker or slower, and the benefits of both scenarios. I’d say, if you have a lot of RIF income, take the maximums in your LIF/s, because they do not have the same flexibility as your RIFs do for larger withdrawals being they have no annual maximum limits. Generally, the CRA has set the min-max and rules to ensure you cannot drain your LIFs prematurely, and to ensure they last you your lifetime.

   Still learning as we go, but feeling better about 2024, as we’ve set up a more hands-off investment and budget approach to our income versus tax and other planned expenses, dividends versus withdrawal rates, and our overall quality of life with a bit larger home in a nicer part of city with walking access to all the ammenities.

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