RRSP Withdrawal Higher Tax Bracket Consequences (OUCH!)

What you may also not know is when you withdraw money out of your rrsp, it can also affect your eligibility for other government benefits such as Old Age Security and Guaranteed Income supplement. And this can have a significant impact on your retirement income. Are you aware of the dangers of tax free growth for an rrsp? I'm sure you've heard that many times. Put your money in an RRSP for tax free growth. While it may seem like a great advantage to have your investments inside the RRSP grow tax free, it can actually have negative consequences when you withdraw the money. And you may also be giving up advantages when your money is not in a registered rrsp. The money you withdraw from an RRSP is actually considered taxable income. And if you are in a higher tax bracket when you retire, you'll end up paying more in taxes on that money. Nelson Nash, a mentor to many, often quoted his golden rule Rethink your thinking when you may also not know. Is that specific to an RSP when you withdraw money from it? What you may also not know is when you withdraw money out of your rrsp, it can also affect your eligibility for other government benefits such as Old Age Security and Guaranteed Income supplement. And this can have a significant impact on your retirement income. Let's take a look at that example. What I'm sharing with you is an individual who's receiving $100,000 for their overall retirement income and now this $100,000 is in terms of that income normally would be 23,708 in the form of taxes where 15,000 is the federal government, 8,000 goes to the provincial. So what is actually ends up in your pocket would be 76,000 292,000. Now if the form of that individual is now in retirement and is collecting other government benefits, what you may not be aware of is there's a benefit called old age security that you are generally entitled to. Most Canadian generally will meet this criteria. But however, if your income is too high, then the government has mechanisms in place where they will actually claw back the amount of government benefits they would pay you for that old age security. Now I don't know about you, but if these were benefits that you are generally entitled to receive and somehow because you've done a great job retiring and getting more income and setting yourself up for retirement, the government is now removing that entitlement from you because you earned too much money in that year. And let's take an illustration of what that would look like. So a general individual would end up paying 23,708. Now, in that form of the income of $100,000, let's use the retiree who actually has a component of the old age security included to form their total $100,000. And so what would that look like? Well, that $100,000 would be reported to the government and they would now know that this individual has $100,000. And the level for the old age security clawback in 2022 is 81,761. So since that is the level that the government has decided would be considered too much income, this individual has $100,000, which is more than the $81,761. So the excess amount of 18,239 is more than then the too much income line of 81,007,61. So there's a amount of tax calculated at 15% or a clawback to remove that amount. And that totals 2007, 36. So in total, actually, the individual ends up paying $26,000 in taxes. So the individual actually plays the old senior who is retired, was worked, or you who has retired and worked very long, saving up for your retirement. And because you withdrawn more than the amount of 81,000, the government wants you to repay that old age security. So this is that clawback illustration and the dangers of what would happen. And the other danger that many of you may not know is by age 71, you get some options to decide how you want to deal with your rrsp. And one of those options is actually to roll it into a registered retired income fund or a rifle. And that RIF is something where it is going to mandate how much money you need to withdraw to melt out that money, you're not allowed to decide in one year not to withdraw out any money. So if one of the years during you reach age 71 and you receive a large amount of income, now, the probability of that may not be very likely, but those situations do actually very much exist. It's not an extreme example. And when they do exist, you actually end up having to withdraw money out of your rifle forcefully and therefore losing on the maximum entitlements that you should be getting from the old age security. The other part to be really considerate about when it comes to an RRSP is the limited flexibility. Ultimately, you are putting money into an RRSP because you're getting a refund for that contribution. The premise of that plan is to be used for retirement. And if you withdraw it early, you're going to face penalty in the form of taxes. And if you ever wanted to use that money that's locked away in the rsp, you have to pay those penalties. That means you can't use the money to do things like for a vacation or paying off debts. And so that is just another issue in terms of the flexibility that you don't have control on the flexibility and how you use your money. You've surrendered that control to the government. Now let's even look into now why tax free growth in an RRSP is actually dangerous for you. So I have an individual who has $10,000 and by virtue has been able to grow that $10,000 to $600,000, meaning there's a $590,000 increase to get to $600,000. Now if this individual had this whole increase inside of an rrsp, here's what it would look like. Remember, in order to get the money out of the rrsp, you have to pay taxes on it. But there was no tax that increased from 10,000 to 600 in order to get all of that $600,000 out of the RSP. In this example, the individual decides to withdraw all of it at once. Eventually you want to withdraw it all out. So in order to get it all out, that whole gain of just that $590,000 gain, 170,000, 9, 7, 3 went to federal taxes, 106 went to provincial taxes. So 312, 805 went to the individual and the rest of the 277 went to the government in the form of taxes. Now that is because it was inside an rsp, in order to get it out, you have to pay taxes on that. I'm just showing you an extreme example. In order to get the money out, you get it all out at once. And here's how much taxes you would pay. Well, here is an alternative example where if that same $590,000 was earned outside in an unregistered account in the form of capital gains, and if you don't know, capital gains is a special type of income where 50% of that would be taxable to the individual on earning that. So that is a special privilege that is in a unregistered account or when it's outside of an rsp. So when that is outside of it, you only have to get taxed on that 50%. So let's take a look at what that would look like. So that $590,000 gain from 10,000 bumped up to 600. So that's 590,000 the total tax. Since only 50% of that is taxable, because of the favorable tax rule in the treatment of capital gain. Income is now 73,000 goes to the federal government, 45 goes to provincial. 119 is the total amount of taxes. So the individual has 470,718 which is drastically different than when it was taken all out at the RF RSP at once. And I know exactly what you're thinking. Who is actually going to be smart enough to withdraw all of their RSPs out all at once? I would take it all bit by bit. And I want you to first think about that. You're not the one in control of making that decision. You are appending. You are complying to the rules that are set forth in the rsp. You're not the one in control of your money that you gained and you earned. So I want to first put that into perspective. But let's take an example where someone generally wants to withdraw $100,000 per year. So that would end up being over six years. What would that look like on that same 600,000 if it was withdrawn over six years? Well, $100,000 in one year is 23,708. And just for keeping everything simple, this is not during the retirement years where you can get old age security. And actually you would most likely get old age security clawback on this level of income. But I'm just keeping this example very simple. So 15,579 went to the federal government. 8,129 went to the provincial government. And in total 23,708. Now if we repeat that over six years of melting out the money out of the RSP over six years, well that's 23,708 times six years. And if we show that 23,708 over six years, that's 142,208. Now you can decide to do that over multiple years. But let me just reintroduce for you to think again. You are the one who's actually not in control in setting the rules. You are bending to the rules that are set into the government and you are maximizing your position over time on the income tax brackets to get your own money out of that financial prison. If you took a one time withdrawal on your RSP, that was 277195 in taxes that you would pay. If you melted it over six years, that's 142,208. Of course it's a lot less than the 277,195 in the one year because we are living in a progressive tax system where the more income you earn, the more taxes you pay. If you kept that money and earned it in an unregistered way, that is going to leave you with paying taxes of 119 282. So by when you put your money in an RSP and that money grows, whether you get interest income that gets taxed a certain way, capital gains that get taxed a certain way which 50% is taxed so that's favorable. And when you receive dividends, you also receive favorable tax treatments on dividends. All of that is wiped out when it's inside an RSP and you just get that income in there. But when you need to withdraw the money out of the rrsp, you are foregoing all of those favorable tax treatments that you would receive on that income you would earn inside that RRSP and instead as an example here, where if you had that same amount of a gain that has happened inside an RSP versus outside an rsp, the tax amount that you end up paying is significantly very very different. It's time for you to take control of your money and your retirement by becoming your own banker and keeping taxes away from your wealth. Don't let the tax free growth of an RSP blind you from the potential consequences that come with it. Take the time to make the right choice for you and your loved ones now and into the future. Click the video link to learn more about the truths about an RRSP that many don't even know.