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By Julie Cazzin with Allan Norman

Q: My spouse and I are 83 and 80, respectively, and I’m shedding my Outdated Age Safety (OAS) because of dividends and my registered retirement earnings fund (RRIF) withdrawals. I want once I was youthful that somebody had informed me dividends could possibly be an issue as a retiree. I’m pondering of cashing out my RRIF this 12 months and cashing in my shares for index funds so I can acquire my OAS pension. Does this make sense? Our tax-free financial savings accounts (TFSAs) are maximized, I’ve $600,000 in RRIFs in addition to a pension of $45,000 per 12 months, and my spouse has $490,000 in a RIFF. Now we have non-registered investments of about $3.5 million with a dividend yield of about 3.2 per cent, and a small rental in my spouse’s title with an earnings of $9,000 per 12 months. — Tim

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FP Solutions: You’re in a great place, Tim, and it’s good to consider decrease your taxable earnings to cut back OAS clawbacks, which apply in case your internet earnings exceeds $90,997 in 2024. And you’ll have to repay 15 per cent of the surplus over this quantity to a most of the full quantity of OAS obtained. Simply watch out that you just don’t do one thing that may value you more cash in the long term.

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Don’t beat your self up about dividend investing. If, if you had been younger, you had been suggested that future dividends might end in OAS clawbacks, chances are you’ll not have the cash you may have right now. Dividend investing is a relatively straightforward inventory choice technique, making it well-liked with DIY traders. That, plus the truth that worth shares — usually dividend payers — have traditionally outperformed progress shares.

At this time, your shares are producing a gradual stream of taxable dividends that you’re reporting in your tax return. Nonetheless, you could report the grossed-up (38 per cent) dividends, not the precise quantity of dividends obtained. For instance, in case you obtain $100,000 in dividends, you report $138,000, which is the quantity used to evaluate OAS clawbacks. After the clawback evaluation, the dividend tax credit score is utilized, bringing down your taxable earnings.

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Dividends are one tax subject in a non-registered account. Capital positive factors, that are the distinction between the e-book and market worth of an asset resembling shares or funding actual property, are the opposite tax subject, and they’re going to additionally impression your OAS eligibility.

The problem with holding particular person shares in a non-registered account is the tax drag (the discount in potential earnings or progress because of taxes on funding positive factors) created by dividends and capital positive factors when buying and selling shares.

My guess is you’re pondering of switching to index funds as a result of they are typically extra tax environment friendly, are longer-term holds and, in accordance with the SPIVA stories — which examine returns from energetic fairness and fixed-income mutual funds and their benchmarks — usually tend to outperform managed portfolios.

Relating to RRIFs, I usually recommend to individuals beginning retirement not to attract greater than wanted until the surplus goes into one other tax shelter resembling a TFSA. The rationale for that is due to the tax drag I described above.

For those who draw extra cash out of your RRIF, you pay tax and have much less cash to reinvest. In your case, Tim, that quantities to about 40 per cent much less or much more, relying on the quantity you draw out of your RRIF. You’re additionally topic to the tax drag of dividends and capital positive factors if you put money into a non-registered account.

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Having stated that, as you draw nearer to the tip of your life, there’s a tipping level when it begins to make sense to attract out of your RRIF and put money into a non-registered account. Within the 12 months of your dying, your marginal tax fee (in Ontario) can be 53.53 per cent. For those who can draw cash out of your RRIF at a decrease tax fee within the 12 months previous to your dying, that’s higher than leaving all of it to the tip when it’s taxed at the next fee.

Identical to the youthful retiree withdrawing extra from their RRIF, you’re nonetheless confronted with much less cash to take a position and a tax drag. The distinction, utilizing the instance above, is that there’s just one 12 months of the tax drag, and in case you had left the cash within the RRIF, just one 12 months for the tax-deferred progress to make up for the bigger tax fee within the last 12 months.

I used to be curious to see what would occur in case you withdrew all of your RRIF cash now at age 83, or sufficient every year to deplete it by age 90, in comparison with leaving all of it till age 90. I discovered that in each instances, utilizing age 83 as your tipping level, you’re higher off not withdrawing extra cash out of your RRIF.

There’s, nevertheless, a bonus in case you withdraw cash out of your RRIF and present it to your kids. I discovered the largest acquire, as measured by the full wealth switch to your kids, got here if you withdrew every part out of your RRIF in a single shot moderately than depleting it over seven years. After all, the full acquire will depend upon what and the way your kids make investments the cash.

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Have you considered charitable contributions? Together with extra RRIF withdrawals, or by itself, you possibly can donate a few of your shares with giant capital positive factors to a charity. By doing this, you keep away from the capital positive factors tax, thereby supplying you with more cash to take a position and a bigger charitable tax credit score.

Tim, with the property you may have, I don’t see you escaping the OAS clawback until you maybe withdraw every part out of your RRIF now and donate all of your non-registered investments to a charity. If it makes you’re feeling any higher, it’s the after-tax OAS quantity you aren’t receiving.

Allan Norman, M.Sc., CFP, CIM, offers fee-only licensed monetary planning companies and insurance coverage merchandise by Atlantis Monetary Inc. and offers funding advisory companies by Aligned Capital Companions Inc., which is regulated by the Canadian Funding Regulatory Group. Allan will be reached at alnorman@atlantisfinancial.ca.

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