Author Topic: RRSP-TFSA-NR FIRE WR Plan? (Read 1292 times)

Retire-Canada

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RRSP-TFSA-NR FIRE WR Plan?
« on: November 06, 2017, 09:01:20 AM »


I'm older [48] so I have a big RRSP vs. my TFSA and NR accounts. My first thought when planning how I will WR my FIRE $ is to simply take it from my RRSP so it doesn't get too big and force me into large mandatory withdrawals at age 71 that are in excess to my needs forcing me to pay high taxes and diminishing the tax deferral benefit of the RRSP. Doing this I would project my RRSP value forward to 71 and once it was small enough that my projections showed it would not cause me high mandatory withdrawals I would rejig where I pulled my money from to optimize taxes paid. Let's call this Plan A - RRSP First.

Lately I have considered another idea I'd like some feedback on. That is with a poor early sequence of returns being a key factor in FIRE failure I started to think perhaps reducing taxes by optimizing my WRs in that respect right off the bat would reduce taxes paid and therefore the $$ value of my early WRs. So implementation would look something like taking a base amount from my RRSP and the some from TFSA and some from NR [both cap gains and dividends]. Let's call this Plan B - Early Tax Optimization.

My FIRE budget is $40K spend and $6K taxes if I pull all $ from RRSP and pay tax on the full amount as regular income. So let's just simplify things and say the max benefit I can achieve with Plan B would be to pay $0 tax. That may be too optimistic, but it gives us a lower bound. Let's say I had $1.15M invest at FIRE [4% of $46K/yr]. So if I paid zero tax say for the first 10yrs of FIRE [age ~50 to ~60] my WR% would be ~3.5%.

There are a few obvious problems with this plan:

1. RRSP could get really huge causing later mandatory WR tax problems
2. I may not have enough $ in TFSA/NR to run Plan B for 10yrs
3. Paying zero tax may not be possible so WR may not be quite as low as 3.5%

Let's not worry about these ^^ problems too much as full deal breakers. What do you think about the idea of early tax optimization as a way to mitigate the sequence of returns risk?
« Last Edit: November 06, 2017, 09:12:17 AM by Retire-Canada »

FIRE_at_45

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #1 on: November 06, 2017, 09:13:39 AM »
Im interested because I have had the exact same thoughts about avoiding taxes. Im 5 years younger so that could be a factor in my decisions as well. I also have a decent sized NR account that will kick out some sizeable dividends. I like the idea of avoiding taxes. To further complicate things I am eligible to collect the CCB with kids so I want to show a lower income.
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Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #2 on: November 06, 2017, 09:24:41 AM »
I agree with the first statement: For your plan, I`d start with figuring out exactly how much you need to draw from your RRSPs in order to no longer have a huge amount at the end. While it isn`t tax efficient, if the account is too large, you`re screwed for taxes at some point. After making that spreadsheet withdrawal plan, then it's time to look at the other accounts, and how they can best be utilized.

Your plan B would still be taxed, since if you needed to drawdown the RRSP; the doing so well in tax-efficiency will mean you are drawing less, and pushing your tax bill further to the future. Just looking rough numbers, 35k should be enough for you to drawdown the full RRSP amount before 71 (35k x 21 years) = 735,000. TFSA is pretty much a 5k reduction in taxable income (return on 100k, which should be reasonably feasible). So just with a draw of 35k RRSP, and pulling 5k from your TFSA, you make it to your yearly rate.

Also, remember that CCP/OAS will come into affect later as well, so the main thing is to get the RRSP money out at the lowest % possible. Regardless of how much you are taking out, you are mostly stuck in the 20% taxation bracket, so there is no large difference in your numbers.

Not much magic you can do with an RRSP, apart from calculating exactly what the longest amount of time you can spread your withdrawals out so that you are low enough at 71 that they are not too high. I think that taking out 46k would be excessive for you RC, you are not taking enough advantage of the free 11k in income tax wise, since with your 40k income per year, the mandatory minimums at 71 are not that bothersome.
« Last Edit: November 06, 2017, 09:26:53 AM by Canadian Ben »

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #3 on: November 06, 2017, 09:34:04 AM »
7-8% of your RRIF (since your RRSP has become an RRIF at 71) is barely 21k if you have 300k in it. And that burns through an account exceptionally quick, so within 10 years
Here's what 300k looks like if you have to withdraw 7-8-9-10-11 (1% more per year)

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #4 on: November 06, 2017, 09:40:30 AM »
A guess for my RRSP value at 50 when I FIRE is $737K.

$40K spend + $6K taxes after 71 looks like:

- $14K CPP + OAS
- so I need $32K/yr from investments
- min WR at 71 = 5.28%
- so RRSP needs to be ~$606K at 71
- using cFIREsim starting with $737K and pulling out $50K for 21 years [50 to 71] leaves my RRSP with $658K on average or $595K median value

So as it stands pulling my full FIRE budget from my RRSP for the full 21yrs gets me close to my age 71 target value. I could pull out a bit more and fund my TFSA every year. This assumes an average result. If I had shitty returns I could always reduce my RRSP WRs as indicated by my projections to age 71.

FWIW - that also means if I get average/median returns I'll never need my TFSA or NR accounts.
« Last Edit: November 06, 2017, 09:48:33 AM by Retire-Canada »

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #5 on: November 06, 2017, 09:47:31 AM »
737k *.04 (almost 30k!)
for the first 15 years, you are removing about 16k from your RRSP each year (if you are taking out 46k/year) = 240,000
At 65, you'd still have 500k+; So I'm sorry, you`re screwed. Taxes are going to get you :D

Um.... Start a small self-company and expenses your livings expenses? That's all I`ve got. You poor thing, you have more money than you need to spend. I feel... sad for you?


Is your housing already paid off? If not, self-directed mortgage might be a way to reduce expenses + use that RRSP money. You'll pay slightly more tax, but all the money will remain with you, rather than the bank. So your 46k will go much further.
« Last Edit: November 06, 2017, 09:49:46 AM by Canadian Ben »

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #6 on: November 06, 2017, 09:50:01 AM »
737k *.04 (almost 30k!)
for the first 15 years, you are removing about 16k from your RRSP each year (if you are taking out 46k/year) = 240,000
At 65, you'd still have 500k+; So I'm sorry, you`re screwed. Taxes are going to get you :D

Um.... Start a small self-company and expenses your livings expenses? That's all I`ve got. You poor thing, you have more money than you need to spend. I feel... sad for you?

Why would I be screwed? As long as my RRSP is at or below $606K at 71 my taxes are levelled quite well and the cFIREsim results I posted support that outcome.

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #7 on: November 06, 2017, 09:57:35 AM »
Screwed for lowering your tax bill*

I didn`t mean screwed for the plan, Your FIRE could start now! It's just that I don`t think you`ll be able to reduce the withdrawals from the RRSP under that 6k/year mark, since if you reduce it earlier, then it just means it`ll be higher later. Maybe someone will chime in with RRSP special loopholes.

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #8 on: November 06, 2017, 10:03:42 AM »
Screwed for lowering your tax bill*

I didn`t mean screwed for the plan, Your FIRE could start now! It's just that I don`t think you`ll be able to reduce the withdrawals from the RRSP under that 6k/year mark, since if you reduce it earlier, then it just means it`ll be higher later. Maybe someone will chime in with RRSP special loopholes.

I think you miss understand my OP above. I am asking if it's worth optimizing taxes for say the first 10yrs to help mitigate the sequence of returns risk. I accept that this will make RRSP management more difficult later. That's a separate question and you need to evaluate the benefit of mitigating the sequence of returns risk first before you can decide if the trade offs are worth it in terms of the RRSP tax implications later.

If you improve your chances of success measurably maybe paying more tax later is a reasonable cost for that outcome?
« Last Edit: November 06, 2017, 10:07:58 AM by Retire-Canada »

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #9 on: November 06, 2017, 10:07:04 AM »
Your FIRE could start now!

I am currently at ~6%WR and I would not be comfortable retiring at that high a WR rate so I could not FIRE today. I'm willing to FIRE at between 4% and 5%WR...which is where I hope to be in 2yrs when I plan to FIRE.

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #10 on: November 06, 2017, 10:11:14 AM »
Ah, I did indeed misunderstand.

But wouldn't that rather be changing the system only if the market crashes? You would not need to optimize unless there is a market crash (sequence of events). So it would have less to do with the first 10 years, but rather doing it during a down market, and the time it would take for it to come back up?

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #11 on: November 06, 2017, 10:15:49 AM »
Ah, I did indeed misunderstand.

But wouldn't that rather be changing the system only if the market crashes? You would not need to optimize unless there is a market crash (sequence of events). So it would have less to do with the first 10 years, but rather doing it during a down market, and the time it would take for it to come back up?

To maximize the mitigation effects of this approach you'd need to lower WRs in advance of a market crash so that the larger portfolio continues to compound at the higher rates of good return years so that when the bad returns happen you've got a larger war chest to ride through the crash with to maximize the mitigation effects of this approach.

If you pulled out higher amounts and only lowered WRs for a crash you get some benefit, but not the same level of mitigation because your portfolio would be smaller when you started to adjust WRs.

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #12 on: November 06, 2017, 10:37:01 AM »
I guess it`s just a question of if you are willing to oversave the amount necessary; since while it`s a safer route (tax optimization for early stages) it`s more taxes in the long run, which puts it in the same category as going below the 4% rule, not taking CCP/OAS in account... Etc.

It is another way to add yourself some protection, at the cost of increasing the total amount you'll need. However, by emptying out your TFSA in this plan, you`re taking away your account that is the easiest to access and use, without having a short term tax hit (if you need a large one-time increase for things like repairs, other life emergencies). Most people like to keep them as their emergency blanket, separate from the cash/bonds that are easily accessible.

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #13 on: November 06, 2017, 10:47:05 AM »
I guess it`s just a question of if you are willing to oversave the amount necessary; since while it`s a safer route (tax optimization for early stages) it`s more taxes in the long run, which puts it in the same category as going below the 4% rule, not taking CCP/OAS in account... Etc.

You are just shifting your WR $ such that you take less out initially and then take more out later. The amount saved would not change with either WR plan. The amount spent per year would not change with either plan. It's just a question of which accounts you access first and whether the sequence of returns mitigation is worth the potential for paying more taxes later, but paying less taxes up front.

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #14 on: November 06, 2017, 10:55:46 AM »
But your taxes would not be the same. If you can save taxes in the beginning, it means you will be paying more afterwords, as the most optimized income would be the exact lowest amount of RRSP withdrawal that would empty them right before you die*

In the tax efficient scenario, you are not pushing -1$ in the first 10 years for 1$ in the future, chances are you will be paying higher amounts of taxes than what you saved later, which is why I'm saying it is a costlier plan. (Not by a huge amount, but still more than the all around optimized scenario, which is paying the least amount of taxes over the whole FIRE plan; rather than minimizing the early years)

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #15 on: November 06, 2017, 11:41:28 AM »
But your taxes would not be the same. If you can save taxes in the beginning, it means you will be paying more afterwords, as the most optimized income would be the exact lowest amount of RRSP withdrawal that would empty them right before you die*

In the tax efficient scenario, you are not pushing -1$ in the first 10 years for 1$ in the future, chances are you will be paying higher amounts of taxes than what you saved later, which is why I'm saying it is a costlier plan. (Not by a huge amount, but still more than the all around optimized scenario, which is paying the least amount of taxes over the whole FIRE plan; rather than minimizing the early years)

Here is a guess based on the basic numbers I posted and a 7%/year return:

$ Saved vs. Paying Extra Taxes 71+

- $6K/yr for first 10yrs = $86.5K at the end of 10yrs
- this then grows to $186.4K with another 11yrs until I hit 71
- lets' say I live to 91
- I could pay an extra $14K/yr in taxes and I would break even around 91 years old by having spent all the money saved in the initial 10yrs of FIRE.
- at a 30% marginal tax rate that equates to ~$47K/yr extra income I could pay tax on

So whether I'd end up paying more in taxes is not certain, but it is a possibility. There are too many variables to get a precise answer.
« Last Edit: November 06, 2017, 11:47:03 AM by Retire-Canada »

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #16 on: November 06, 2017, 11:52:06 AM »
Makes sense.

However you wouldn`t want to be paying 0$ in taxes right away, since if you`re starting with that 747k RRSP, you have to start taking some out right away in order to not have it balloon up to excessive levels, and as we looked above, you would probably be good with something near the 30-35k mark (which should keep your RRSP from getting larger), and then you fill the rest of your 40k income + taxes with the more effective TFSA/NR accounts. Even that low withdrawal will probably see your RRSP continue to grow...

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #17 on: November 06, 2017, 12:08:38 PM »
Just one possibility based on Simple Tax for BC:

- $4K qualified dividends
- $4K cap gain [on $16K WR from NR]
- $10K RRSP
- $10K TFSA
- Equates to $40K - $54 taxes = ~$40K spend I can generate $54 by returning my beer bottles to pay my taxes!

After the first 10yrs of low WR to mitigate the sequence of returns risk you could jack up WR from RRSP to say ~$78K/yr for next 11yrs to 71 and still only be in the ~18% combined BC/Fed tax bracket. The excess funds you don't need each year go back to the TFSA then NR accounts to continue growing outside RRSP.
« Last Edit: November 06, 2017, 12:26:19 PM by Retire-Canada »

Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #18 on: November 06, 2017, 12:38:43 PM »
But these are your lowest income years (until 65), which would make sense to want to get the most out of your RRSP at the lowest possible levels, since after CCP/OAS comes into effect. When you start jacking up the WR, you are paying close to an extra 1/3 of taxes (78k gives me 18700 in taxes, with 40k being 7,500) ; so it depends on what longevity you see for your portfolio and yourself. Though after running the numbers, seems to be a very small effect long-term. It`s just the gains are now mostly in RRSP, rather than concentrated on the more tax-efficient accounts, as they've already been raided; rather than raiding the least tax-efficient one as soon as possible during the lowest income time-frame.

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #19 on: November 06, 2017, 12:46:27 PM »
But these are your lowest income years (until 65), which would make sense to want to get the most out of your RRSP at the lowest possible levels, since after CCP/OAS comes into effect. When you start jacking up the WR, you are paying close to an extra 1/3 of taxes (78k gives me 18700 in taxes, with 40k being 7,500) ; so it depends on what longevity you see for your portfolio and yourself. Though after running the numbers, seems to be a very small effect long-term. It`s just the gains are now mostly in RRSP, rather than concentrated on the more tax-efficient accounts, as they've already been raided; rather than raiding the least tax-efficient one as soon as possible during the lowest income time-frame.

$40K as I have shown above is $54/yr in taxes if you optimize it not $7500 and the marginal tax rate is ~20%.

Let's assume I live to 110. Is it a reasonable trade off to get enhanced portfolio survival [mitigated sequence of returns risk] in exchange for paying more taxes at a later date when I have money far in excess of my needs? Because if I get poor returns then the extra tax payments don't materialize. It's only when things work out nicely for me that I have a huge RRSP that generates extra tax payments.
« Last Edit: November 06, 2017, 12:52:55 PM by Retire-Canada »

LadyDividend

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #20 on: November 06, 2017, 12:57:07 PM »
It might be worthwhile to take $5000 out of your RRSP every year, and move it to a TFSA or NR account. The reason why is because up to $5000 you pay the lowest withholding tax:

If you withdraw: Withholding tax rate (except Quebec)
Up to $5,000 10%
Between $5,000 and $15,000 20%
More than $15,000 30%

https://getsmarteraboutmoney.ca/plan-manage/retirement-planning/rrsps/making-rrsp-withdrawals-before-you-retire/
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Canadian Ben

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #21 on: November 06, 2017, 01:30:52 PM »
It might be worthwhile to take $5000 out of your RRSP every year, and move it to a TFSA or NR account. The reason why is because up to $5000 you pay the lowest withholding tax:

If you withdraw: Withholding tax rate (except Quebec)
Up to $5,000 10%
Between $5,000 and $15,000 20%
More than $15,000 30%

https://getsmarteraboutmoney.ca/plan-manage/retirement-planning/rrsps/making-rrsp-withdrawals-before-you-retire/

Withholding doesn't really apply, since you get that money back when you do your taxes. It's just an annoyance to take into account. The money is just held because it's their estimate of what you'll have to pay in taxes. Whether that it true or not is figured out at tax time.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #22 on: November 06, 2017, 02:55:29 PM »
Interesting thread as I am in a similar position. I am 51 and will be working PT for the next 18 months or so. My RRSP is currently $930k with my wife having another $200k (plus a govt pension in 2020). When I fully retire at 53 I expect my RRSP alone will likely be around 1.1 and while I have not done the math like RC has done I am planning on doing his plan A. While I will be paying tax earlier, the last thing I want is for the last one to live between my wife and I to be sitting on a huge RRSP so the government gets a big amount in the high tax bracket. I would rather draw down the RRSP up to the max of the tax bracket I am comfortable with that meets my spending needs and then put the rest in the NR account. Thats my plan till age 71 (hoping I see that age of course). Given that is my objective I likely will not do similar math as RC has done but I certainly understand and can appreciate the question. Great comments so far.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #23 on: November 06, 2017, 04:58:34 PM »
Interesting scenario R-C! Just so we have full context, what would your projected numbers be for each account type at retirement age (50)? In retirement, would you have any other income? Do you plan to remain in B.C.? Is your NR invested in Canadian stocks, and what is the divvy yield?
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Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #24 on: November 06, 2017, 05:13:38 PM »
Interesting scenario R-C! Just so we have full context, what would your projected numbers be for each account type at retirement age (50)? In retirement, would you have any other income? Do you plan to remain in B.C.? Is your NR invested in Canadian stocks, and what is the divvy yield?

Estimated account values at 50 [end 2019]:

- RRSP = $737K
- TFSA = $85K
- NR = $116K 100% VCN 2.25% [12 month trailing yield]
- Total = $938K

I plan to remain in BC and travel from there. No specific plans to work, but I am currently self-employed as a consultant and my business deductions are ~$14K - $20K/yr so I could earn that much and not see much change in my taxable income.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #25 on: November 06, 2017, 05:16:45 PM »
This won't answer all your questions, but I found it helpful when we took over managing MILs accounts. It was a big change to go from only worrying about accumulation (ours) to also worrying about WR (hers).

http://pabroon.blogspot.ca/2015/05/retirement-planning-and-forecasting-20.html

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #26 on: November 06, 2017, 06:07:09 PM »
Estimated account values at 50 [end 2019]:

- RRSP = $737K
- TFSA = $85K
- NR = $116K 100% VCN 2.25% [12 month trailing yield]
- Total = $938K

I plan to remain in BC and travel from there. No specific plans to work, but I am currently self-employed as a consultant and my business deductions are ~$14K - $20K/yr so I could earn that much and not see much change in my taxable income.
I believe you would be best to start drawing from your RRSP as soon as you can. Even if it's only half of your income needs, you need to halt the big growth of that account and preferably preserve growth in the TFSA as it's never taxed.

Drawing from your better tax accounts will allow you about 6 years of virtually tax free living. The issue is that your RRSP will grow to $1M+ during that period. At age 56, you only have a few years left before you start collecting CPP & OAS, both of which you are best to take as early as possible. With CPP at 60, you could have $7,000 a year in fully taxed income. At 65, add another $6,800 for OAS. It would be very realistic to have a tax rate of 20% or higher at 71 when minimum withdrawals kick in. In effect, reducing tax rates early will end up costing you in the long run and high mandatory RRIF withdrawal rates on your only remaining retirement account could hurt your retirement success probability by the percent or two you might gain from the initial low spending.

Ideally, you want the TFSA to grow as long as possible to offset the income provided by CPP & OAS and reducing the RRIF hit. At 70, you could see a TFSA at $250,000 with no new contributions from 50-70.

It's the curse of the RRSP!
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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #27 on: November 06, 2017, 08:35:24 PM »
Following with interest. I am in a similar boat with 86% of our investments in RRSPs and 14% in TFSA.

My intention has been to pull from RRSPs first to give the TFSAs a few decades to grow, grow and grow. Simplistic perhaps but however you slice it, the more you have in RRSPs the more tax you will pay, so drain them first.

Also, fees for retirement homes are generally on a sliding scale based on income. So draining the RRSPs by about the time we are approaching nursing home age has additional benefits.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #28 on: November 07, 2017, 07:25:37 AM »
Your decisions appear to be mostly based on asset location, but just a reminder to factor in asset allocation as well. It's not usually ideal to replicate your overall asset allocation in each location, so typically one might have all of one's bonds in one account for example. Drawing down from that account may force you to buy bonds elsewhere. Just another thing to consider in case this isn't complicated enough for you :)

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #29 on: November 07, 2017, 08:15:20 AM »
Your decisions appear to be mostly based on asset location, but just a reminder to factor in asset allocation as well. It's not usually ideal to replicate your overall asset allocation in each location, so typically one might have all of one's bonds in one account for example. Drawing down from that account may force you to buy bonds elsewhere. Just another thing to consider in case this isn't complicated enough for you :)

I will hold bonds only in my RRSP and only buy a specific dollar value so I won't be rebalancing with my stocks. In terms of stocks since most of my money is in tax advantaged accounts I can rebalance as necessary with no tax implications. So I don't see this an issue for my FIRE.

Retire-Canada

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #30 on: November 07, 2017, 08:24:45 AM »
In effect, reducing tax rates early will end up costing you in the long run and high mandatory RRIF withdrawal rates on your only remaining retirement account could hurt your retirement success probability by the percent or two you might gain from the initial low spending.

Thanks for the reply RM. With a failure rate against historical data of 3% to 4% for a 4%WR portfolio reducing the failure rate by 2% [agrees with my initial broadstrokes analysis] is a 50% to 66% reduction in failure potential...that's not insignificant. I am not sure yet if the overall tax paid is a huge problem in terms of either the excess costs being staggering or the costs adding a new failure mode later in retirement. I plan to develop some cFIREsim results later this week when I am not working to see.

Let's just assume for the sake of argument that the benefit of the early tax optimization approach was a reduction in failure of a 4%WR plan by 2%, that there was no added failures later in FIRE, but that there was a very high cost in terms of additional taxes to be paid. In that case it could be argued that the early sequence of returns risk mitigation was well worth the cost at the back end since you only pay that cost if your portfolio grows to be huge at which point you have no use for the excess money. Keeping in mind folks do a variety of "expensive" things to mitigate portfolio risk like hold huge bond allocations, buy annuities or over save to a really low %WR.

I realize this ^^^ is just back of the napkin conjecture at this point. I'll come back with some cFIREsim results as soon as I can.

FWIW - I have no kids and no relatives with kids that are in need of cash. So if I end up with several million dollars at the end of FIRE I'll donate it to a worthwhile charity like Retire Canada Cat Shelter. :)
« Last Edit: November 07, 2017, 08:34:00 AM by Retire-Canada »

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #31 on: November 07, 2017, 09:05:56 AM »
This thread is great and timely for me. Thanks for sharing the numbers. I still need to approximate my CPP. Since Ill presumably work 5 less years than you I guess I can use yours as an approximation. I will have 22 years of contributing at the maximum and then another 10 years of contributing since I starting working at 12.

Damn, I have worked too long already!

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #32 on: November 07, 2017, 09:07:23 AM »
This thread is great and timely for me. Thanks for sharing the numbers. I still need to approximate my CPP. Since Ill presumably work 5 less years than you I guess I can use yours as an approximation. I will have 22 years of contributing at the maximum and then another 10 years of contributing since I starting working at 12.

Damn, I have worked too long already!

You shouldn't have been contributing to CPP until you turned 18.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #33 on: November 07, 2017, 09:11:15 AM »
5 more years then on top of 22. Ive been in my account but I could not find the prediction area. I need to get in there again and figure it out.

When you start collecting CPP and OAS do you think you will drop your bond allocation? Long time to think about it but something more to consider.
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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #34 on: November 07, 2017, 09:23:30 AM »
5 more years then on top of 22. Ive been in my account but I could not find the prediction area. I need to get in there again and figure it out.

When you start collecting CPP and OAS do you think you will drop your bond allocation? Long time to think about it but something more to consider.

The prediction on the Gov't site assumes you will continue to work until you collect CPP and that your future work pattern will look like your past. So for MMM types the prediction is not all that useful. That said if you go the PT consultant route you are talking about you may well accumulate many more full contribution years for CPP since the max income is fairly low.

Honestly CPP/OAS are 10-15yrs out from when I'll FIRE so what I will do with bonds that far in the future is anyone's guess. At the moment my plan is to buy say $120K of bonds and just hold them reinvesting interest payments, but not rebalancing with stocks. If/when there is a big crash I'll spend them. Unless that crash is right off the hop when I FIRE I will likely not replace them. So if markets operate as expected I'll either have no bonds by CPP/OAS age or their value will be outrun by the growth of stocks and they will form a very small part of my portfolio.

TrMama posted a link above and on that site there is a CPP Benefit calculator: http://pabroon.blogspot.ca/2014/03/cpp-calculator.html

I haven't bothered calculating my CPP in detail because nailing it down to a specific number isn't that important to me at the moment. I have paid in at max levels most of my adult life so I know I will get a significant amount, but not the max. Given that there is nothing I will do differently today based on whether my CPP is $5K, $6K, $7K or $8K/yr at 60 or 65 I don't see the value trying to work it out too precisely. Once I am FIREd I'll have 10yrs to work it out and then decide if I take it at 60 or 65 or even 70.

My investment "ship" is headed for a target of 4%WR - 5%WR with a lot of momentum and my age is pushing my retirement goals more so than any impact a change in CPP would have. Not to mention that, like you, I may well keep adding to CPP if I do consulting work in the future.

All that to say a guess at CPP seems to suffice for now. ;)
« Last Edit: November 07, 2017, 09:26:08 AM by Retire-Canada »

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #35 on: November 08, 2017, 08:39:04 AM »
Here is an estimate of my Portfolio at 71 using cFIREsim to generate the median values.

Estimated account values at 50 [end 2019]:

- RRSP = $737K
- TFSA = $85K
- NR = $116K
- Total = $938K

Option 1:Plan A - RRSP First
- pull $46K/yr from RRSP 50 to 65
- pull $32K/yr from RRSP 66 to 71 [plus $14K CPP/OAS]
- leave TFSA & NR alone
- RRSP at 71 = $763K median with 18% chance of emptying account
- TFSA at 71 = $329K median
- NR at 71 = $449K median
- Total Median Portfolio at 71 = $1.54M
- Mandatory WR at 71 = 5.28% of $763K = ~$40K + $14K CPP/OAS = ~$54K/yr total

Option above is just pulling $46K from RRSP and leaving everything else alone. Option below I pull an extra $6.2K [$5.5K +$700 tax] to fund TFSA with $5.5K each year.

Option 2:Plan A - RRSP First
- pull $52.6K/yr from RRSP 50 to 65 = $46K spend + fund TFSA with $5.5K/yr
- pull $38.6K/yr from RRSP 66 to 71 [plus $14K CPP/OAS]
- leave TFSA & NR alone
- RRSP at 71 = $471K median with 29% chance of emptying account
- TFSA at 71 = $591 K median
- NR at 71 = $449K median
- Total Median Portfolio at 71 = $1.51M
- Mandatory WR at 71 = 5.28% of $471K = ~$25K + $14K CPP/OAS = ~$39K/yr total

Guess at total taxes paid 50 to 95 = $6K x 45 = $270K.

Before we go any further I just want to point out that due to my stock heavy portfolio the actual results varied between running out of funds in my RRSP before 71 and having $3M+ in my RRSP at 71. So huge variability. The results above are median values so it's just a slice down the middle of the possible outcomes. In practice that means if I go this route I'll have to project forward to 71yrs old every few years and make changes as needed. That said the worst case scenario is having $3M in my RRSP at 71 and being forced to take out ~$160K/yr. Yes that would be a lot of taxes, but shit that's a problem I won't mind having in FIRE. ;)

If my RRSP is getting depleted faster than anticipated due to crappy returns I can throttle back how much I withdraw to level my income at a lower annual amount.

Both these options get me to a marginal WR tax rate in FIRE from my RRSP that's lower than the vast majority of my contribution $ were put in so that's a win.

I'll work on the simulation for Plan B - Tax Optimized Early WRs next and see what things look like at 71 for comparison.
« Last Edit: November 08, 2017, 10:08:30 AM by Retire-Canada »

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #36 on: November 08, 2017, 08:59:34 AM »
I love how you are going through these calculations. Its very helpful to me because I need to do the same thing.
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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #37 on: November 08, 2017, 10:08:30 AM »
Before we go any further I just want to point out that due to my stock heavy portfolio the actual results varied between running out of funds in my RRSP before 71 and having $3M+ in my RRSP at 71. So huge variability. The results above are median values so it's just a slice down the middle of the possible outcomes. In practice that means if I go this route I'll have to project forward to 71yrs old every few years and make changes as needed. That said the worst case scenario is having $3M in my RRSP at 71 and being forced to take out ~$160K/yr. Yes that would be a lot of taxes, but shit that's a problem I won't mind having in FIRE. ;)
This is the danger in doing a 2-part calculation through cFIREsim. Because the calculator doesn't allow for a multiple stage spending plan, or account for the increased net withdrawals due to increasing tax costs in a large RRSP/RRIF scenario, it's hard to make a good simulation for your strategy. Also, don't forget that if your RRIF + CPP income is over $73,000 you start getting clawed back on your OAS. This means your real tax costs are much higher than you think (OAS is a sort of negative tax).

Both these options get me to a marginal WR tax rate in FIRE from my RRSP that's lower than the vast majority of my contribution $ were put in so that's a win.
This is important, haha! As long as your real taxes in withdrawals stages are lower than the deduction from your contribution, the RRSP is doing what it should.

I'll work on the simulation for Plan B - Tax Optimized Early WRs next and see what things look like at 71 for comparison.
I would also try a middle of the road simulation (Plan C). Basically withdrawing from RRSP & NR first, then RRSP & CPP & TFSA, then RRSP/RRIF & CPP & OAS & TFSA targeting a 10% blended tax rate. I think you will find this the most appealing with the lowest overall tax costs with a low possibility of impacting OAS benefits.

Regarding your CPP, don't forget there's a low-earnings dropout which excludes about 7-8 years of non-contributing years from your benefit calculation without a penalty.

Generally speaking, an early retiree living from investment proceeds is best to take CPP & OAS as early as possible even with the penalties, as long as it offsets the withdrawals from your investment accounts and you are primarily funding yourself with an RRSP (because of tax costs). It gets a little murkier when TFSA & NR come into the picture, or if you live well past the median life expectancy.
There's little to no benefit in deferring CPP & OAS to age 70 and it will often reduce success rates if you are in a full tax situation (high RRIF withdrawals + big CPP + big OAS).
Maybe the best strategy is holding your breath at 60 and start claiming early only if the market crashes, otherwise claim both at 65.

Either way, keep us posted on your results as they are definitely interesting for all of us!
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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #38 on: November 08, 2017, 10:18:26 AM »
Estimated account values at 50 [end 2019]:

- RRSP = $737K
- TFSA = $85K
- NR = $116K
- Total = $938K

Planned Spend from 50 to 60

- $2K qualified dividends
- $3K cap gain [on $14K WR from NR]
- $17K RRSP
- $10K TFSA
- Equates to $41K - $1K taxes = ~$40K spend

Planned Spend from 60 to 65

- $77K RRSP [28% marginal tax rate]
- Equates to $61K - $16K taxes = ~$40K spend + 5.5K TFSA Addition+ $15.5K NR Addition + 16K taxes

Planned Spend from 65 to 71

- $63K RRSP [28% marginal tax]
- $14K CPP/OAS
- Equates to $61K - $16K taxes = ~$40K spend + 5.5K TFSA Addition+ $15.5K NR Addition + 16K taxes

Plan B - Tax Optimize Early

- RRSP at 71 = $1.61M median with 0% chance of emptying account
- TFSA at 71 = $153K median with a 23% chance of emptying account
- NR at 71 = $361K median with a 24% chance of emptying account
- Total Median Portfolio at 71 = $2.1M
- Total Taxes Paid up to 71 = $186K
- Mandatory WR at 71 = 5.28% of $1.61M = ~$85K + $14K CPP/OAS = ~$99K/yr total
- Taxes owed on $99K income = $23K
- Guess at total taxes to 95 = $186K + $23K x 20 = $646K
- Guess at value of extra portfolio growth 71-95 = $2.1M - $1.5M = ~$600K for 24yrs = $3.36M median value

Before I even get started I acknowledge these ^^ calculations involve a lot of assumptions and some significant problems. The biggest of which is how to calculate the taxes I'd pay on RIFF WRs from 71 to death [say 95]? I think my numbers above understate those taxes since just projecting taxes paid at 71 to 95 in linear fashion doesn't capture the likely growth of the RIFF nor the change in annual WRs.

That said I think it's interesting that the extra $600K of portfolio value at 71 for Plan B vs. Plan A over the many years until death gives you over $3M to pay taxes from while still breaking even. That allows you to pay a freaking huge amount of extra taxes due to big RRSP at 71 and still not suffer. Note that if you don't get good returns such that the growth of the extra $600K is poor you also won't have to WR as much from the RRSP and won't have to pay as much tax. So it's got a self-correcting feature built into it.

These calculations are complicated and I may have screwed something up so don't take these ^^ numbers at face value unless a few of us look at the situation and come to similar conclusions. And again I'll emphasis the guess at total taxes paid 71 to 95 above is too low. I just don't know how to accurately figure out that number.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #39 on: November 08, 2017, 10:41:26 AM »
Either way, keep us posted on your results as they are definitely interesting for all of us!

To answer most of your points. Yes this is a very crude way to simulate things and does underestimate some taxes for sure. But I think it is at least useful for teasing out some of the more important elements.

So thoughts about Plan B

1. provides an option to address sequence of returns risk without lowering spending or working
2. gets you to 71 with more $$ in your investments
3. most likely result in higher taxes paid
4. extra $$ in investments at 71 grow to cushion impact of higher taxes
5. I don't see a path to higher back end FIRE risk

So far anyways Plan B doesn't sound like crazy talk.

Questions I still have:

- will you actually pay more taxes with Plan B net of additional portfolio value that is generated due to lower early WRs? If so how much?
- how much is the early sequence of returns protection that is afforded?


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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #40 on: November 08, 2017, 10:46:53 AM »
On the CPP question I left CPP/OAS at 65 for the ease of simulating vs. breaking out one more factor. In practice by the time I get to 60 I should have a pretty good handle on how my FIRE is going. Most of the possible scenarios involve me having far more money than I need. In those cases optimizing CPP/OAS are kind of irrelevant really. I have no kids and don't care about competing for who is the richest amongst my friends.

You raise some good points, but they only matter in the smaller set of circumstances that after 10-15yrs my portfolio is struggling. If that turns out to be my reality I will have plenty of time to obsess on the most optimal way to get whatever benefits I can and paying crazy taxes on my huge RRSP won't be an issue.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #41 on: November 08, 2017, 11:03:19 AM »

Questions I still have:

- will you actually pay more taxes with Plan B net of additional portfolio value that is generated due to lower early WRs? If so how much?
- how much is the early sequence of returns protection that is afforded?

I think you are close to running even in the long run due to the size of the brackets in BC. It`s only an 8% difference between first 39k income and 79k income. From the very start you are saving more by cutting taxes; and since then is very little difference between 39k and 79k, you can pull much larger amounts later like you said, with very little difference. I think the main issue will be the CPP/OAS, and end life portion, but since you'll be able to rebuild your TFSA the moment you start drawing 79k from the RRSP, it'll even back out later.

So many variables... I'm looking forwards to someone putting down the math, and showing that it's perfectly balanced on both sides, changing nothings :D (not saying that it is, but that it would be amusing if it ends like that)


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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #42 on: November 08, 2017, 11:20:35 AM »
Paying more for the extra sequence of returns risk protection wouldn't bother me....especially if you only pay it when your portfolio is firing cash at you like a drunken sailor. ;)

That said breaking even would be better as you would get the downside protection for free.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #43 on: November 09, 2017, 10:12:33 AM »
If slow travel or living abroad is something you would consider, you can become a non-resident for tax purposes by cutting resident ties with Canada, even if it's for a short period, and then withdraw everything from your RRSP at a max tax rate of 25%.

You could then reinvest in a NR account, live tax free in certain countries, and when you come back to Canada engineer a portfolio that results in no income tax.
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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #44 on: November 09, 2017, 10:43:48 AM »
If slow travel or living abroad is something you would consider, you can become a non-resident for tax purposes by cutting resident ties with Canada, even if it's for a short period, and then withdraw everything from your RRSP at a max tax rate of 25%.

You could then reinvest in a NR account, live tax free in certain countries, and when you come back to Canada engineer a portfolio that results in no income tax.

That's an interesting option. I do plan to get an RV/van and travel in US/Mexico for several months a year. I am keen on driving down as far as Costa Rica one time and could stretch that out into a couple year trip.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #45 on: November 11, 2017, 08:43:48 AM »
If slow travel or living abroad is something you would consider, you can become a non-resident for tax purposes by cutting resident ties with Canada, even if it's for a short period, and then withdraw everything from your RRSP at a max tax rate of 25%.

You could then reinvest in a NR account, live tax free in certain countries, and when you come back to Canada engineer a portfolio that results in no income tax.

I looked into this a bit more and it's not all that realistic. You'd have to do the following:

1. leave Canada [easy]
2. establish residence elsewhere [less easy, but not impossible ie. I have a Swiss passport]
3. withdraw say $750K from RRSP lump sum CRA will withhold 25% [~$188K]
4. pay income tax on the $750K in new country of residence presumably getting a credit for $188K withheld in Canada
5. hope you come out ahead in terms of taxes paid [you wouldn't in Switzerland, but you might in some low tax country if you can get resident status]

You could pull the money out, pay the CRA $188K withholding tax and not pay tax anywhere else [ie. slow travel], but given that I want to come back to Canada I think there is fairly reasonable chance of getting audited by the CRA and if I can't prove that 1) I was a resident somewhere else and/or 2) that I paid tax on that amount of income in the country of residence I'll get a whopping huge deferred tax bill when they figure it out. FWIW the tax owed on $750K of income in BC is $328K!!

The other issue is that in BC $110K/yr of income hits a ~25% average tax rate so taking a whole bunch of risk to pay 25% tax doesn't seem all that sensible. The average tax rate at $77K/yr is ~21%.
« Last Edit: November 11, 2017, 08:49:57 AM by Retire-Canada »

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #46 on: November 11, 2017, 11:17:36 AM »
Most countries have a tax treaty with Canada to prevent local taxation on lump sum withdrawals from pensions/RRSPs.

You're definitely limited to a certain group of countries to make it worthwhile. Places like Costa Rica, Panama, Belize, Ecuador, Thailand, Malaysia, and a few others allow easy residency and do not tax overseas income so you would pay no tax there.

New Zealand is interesting as well because a treaty prevents local taxation after the RRSP withholding tax and the treaty limits the withholding tax on the Canadian side to 15% on lump sum withdrawals. I don't know if there are any other hitches with this option, but obviously New Zealand isn't necessarily cheap to live and not as easy to get residency.

Another easy option to reduce your net tax on the RRSP withdrawals process is to take out an investment loan in your NR and invest that. The interest is 100% deductible from the RRSP withdrawals, the dividends are taxed low, and you can achieve net account growth.
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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #47 on: November 11, 2017, 11:59:20 AM »
If $77K/yr income = ~21% average tax rate and $110K/yr income = ~25% average tax rate it doesn't make a lot of sense to jump through hoops to liquidate the RRSP as a lump sum to get a 25% tax rate. I can pull plenty of extra $$ out each year at lower or comparable tax rates if taming the RRSP is a concern. If I can't keep my RRSP under control at $110K/yr income levels thanI don' have a tax problem I have lucked up on my sequence of returns.

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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #48 on: November 11, 2017, 01:47:45 PM »
If $77K/yr income = ~21% average tax rate and $110K/yr income = ~25% average tax rate it doesn't make a lot of sense to jump through hoops to liquidate the RRSP as a lump sum to get a 25% tax rate. I can pull plenty of extra $$ out each year at lower or comparable tax rates if taming the RRSP is a concern. If I can't keep my RRSP under control at $110K/yr income levels thanI don' have a tax problem I have lucked up on my sequence of returns.

It doesn't make sense to move and claim non-resident status for a few years if it results in a higher tax rate. But using your withdrawal scenario, let's assume you beat sequence of returns risk (very likely) and have $1.6M or more in your RRSP in your late-60's coming into that dreaded 71 (also quite likely).

At this point, you can see that mandatory withdrawals are going to drastically increase your expenses and WR due to tax costs. The surface tax cost might be around 25%, but your real tax cost is much higher because of OAS clawback (15% of benefit over ~$75,000). Also, don't forget that dividend income is grossed up for your income calculation which actually increases your chances of having a full clawback or not receiving any OAS.

If you find yourself anticipating this situation, you can defer your OAS benefit, move to say Costa Rica for a couple years, clean out your RRSP and pay the 25% tax, reinvest the balance in a NR account, and drastically reduce your future taxable income because of a switch to capital gains and dividends. On your return to Canada, your OAS benefit would stay intact so your real tax rate inclusive of the OAS benefit would be reduced and it's likely your lifestyle could improve quite nicely because of this maneouver. It also allows you to claim capital losses if the market crashes following your return to Canada (something you can't do in an RRSP/RRIF).

This is a lifestyle choice as much as a financial choice; I'm simply sharing options available to you. If travel or overseas living is in your lifestyle plan parameters, this is a bit of financial icing on that cake.

Also, as long as you follow the steps correctly you won't be in trouble with the CRA. The Tax Act and subsequent case law have done a pretty good job clarifying what it means to cut resident ties when moving to another country. It's also clear the move does not have to be permanent. If you're in doubt, you can even file a NR73 with the CRA to have them examine your move and confirm that you are indeed a non-resident. Most people who have their ducks lined up don't bother with this and simply file a departure tax return.
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Re: RRSP-TFSA-NR FIRE WR Plan?
« Reply #49 on: November 16, 2017, 06:13:41 PM »
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