2 Things You Should Know About RRSPs, RRIFs, and Withdrawals

Investing high-quality stocks such as The Coca-Cola Co (NYSE:KO) in your RRSP makes your retirement more comfortable than placing your money in cash equivalents to earn interest. But have you thought about withdrawals before and after retirement?

| More on:
The Motley Fool

Because the registered retirement savings plan (RRSP) is a vehicle for us to save for retirement, I want my hard-earned money to grow safely there. But I don’t want it to be so safe that it only grows 1% a year from earning interest.  

Instead, I hold high-quality stocks such as Canadian REIT (TSX:REF.UN), Boardwalk REIT (TSX:BEI.UN), The Coca-Cola Co (NYSE:KO), and Kinder Morgan Inc (NYSE:KMI) my RRSP. They offer higher yields and growth potential compared to interest-earning vehicles. Holding them for decades will make a huge difference.

When building our investment portfolio, we sometimes forget about important issues such as withdrawals. Here are some things that you may not know, but should.

Withdrawal before retirement

If you withdraw from an RRSP before retirement, your financial institution will immediately withhold 10% for amounts up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for amounts over $15,000. The withheld amount will be paid to the government directly.

For example, if you take out $25,000 from a RRSP for an emergency, you’ll only receive $17,500 after the $7,500 deduction. At tax-reporting time, you might end up paying more taxes depending on your tax bracket and situation.

There are two situations in which withdrawing from an RRSP makes more sense. When you buy your first home you can take out $25,000 for the down payment, but you won’t pay any tax on that if you pay it back over 15 years. So every year, you’ll need to contribute at least $1,666.67.

Likewise, you can withdraw $10,000 per year up to $20,000 in a lifetime from your RRSP for education or training under the government’s Lifelong Learning Plan. For this, you have to pay it back over 10 years to avoid paying any taxes.

Withdrawal after retirement

To withdraw set amounts after retirement, you can open a registered retirement income fund (RRIF) account by transferring money from an RRSP. For example, you might retire at 67 and would like to access set amounts every month. Then you can transfer a portion of your RRSP to your newly opened RRIF.

The minimum amount you must take out from your RRIF each year if you’re under 70 is calculated by 1/(90 – age), which would be 4.35% in this example. The minimum amount increases as you get older.

By the end of the year, in which you turn 71, you are required to change your RRSP to an RRIF, and once an RRIF is set up, you cannot contribute to it anymore. Any withdrawals from a RRIF are fully taxed.

In conclusion

It’s best not to withdraw from an RRSP because you’ll be taxed heavily, since the ultimate goal is to save for your retirement. But if you really have to tap into your retirement savings, you can do so for the down payment of your first home or for education or training.

Holding quality stocks in an RRSP will allow your money to compound over time for sizable gains. The best part is, you won’t need to sell any assets when you withdraw because you can withdraw the income generated by your investments. You just need to make sure that the portfolio yield is higher than your minimum withdrawal requirement, or that there’s a cash buffer for some leeway.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of BOARDWALK REAL ESTATE INVESTMENT TRUST, CDN REAL ESTATE UN, Coca-Cola, and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan and has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

3 Canadian Dividend Stocks to Buy Hand Over Fist

These three Canadian dividend stocks each offer a unique opportunity, making them some of the best investments to buy at…

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

Retirement Wealth: 2 Oversold Canadian Stocks to Buy Now and Own for Decades

These industry-leading dividend stocks look cheap right now and have increased their distributions annually for decades.

Read more »

Tired or stressed businessman sitting on the walkway in panic digital stock market financial background
Dividend Stocks

2 of the Safest TSX Stocks Right Now

The stock market is heading towards a crash. Investors are seeking the safety of dividends, and these two stocks provide…

Read more »

Payday ringed on a calendar
Dividend Stocks

Want Monthly Passive Income? Try These TSX Dividend Payers

In need of extra cash? These dividend stocks offer passive income each month, and you can pick them up cheap…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Want Safe Passive Income? Here Are 2 TSX Dividend Aristocrats for New Investors

Need some safe passive income? TSX Dividend Aristocrats like Fortis (TSX:FTS) are ideal stocks for new investors to hold in…

Read more »

grow dividends
Dividend Stocks

2 Cheap TSX Dividend Stocks to Buy Now

These top TSX dividend stocks now offer 6% yields.

Read more »

Piggy bank next to a financial report
Bank Stocks

Got $500? Create Passive Income of $500 in Just 33 Years

Only have a bit of cash to invest? By investing in the right stock, you could make $500 in annual…

Read more »

calculate and analyze stock
Dividend Stocks

2 Top TSX Dividend Stocks to Buy Now for a Self-Directed TFSA or RRSP

Top TSX dividend stocks are now trading at attractive prices for TFSA and RRSP investors.

Read more »