Kurt, 69, and Eloise, 64, want to help their 40-year-old daughter, a single parent, buy her first home.Jennifer Gauthier/The Globe and Mail
Retirees Kurt and Eloise are self-directed investors living mainly on the returns from their substantial registered retirement savings plans. He is 69, and she is 64.
Their combined RRSP holdings surpass $4.8-million.
“We’ve gained over $1-million this year so far in our RRSPs,” Kurt wrote in an e-mail.
They want to help their 40-year-old daughter, a single parent, buy a house.
“Should we take this windfall and split it 50-50 with the Canada Revenue Agency?”
How much should Jodi, 74, spend in retirement without leaving a big estate?
They both had well-paying careers in the energy industry. “We were lucky in being able to contribute annual maximums to our RRSPs starting in our 30s,” Kurt wrote. “We both retired in our 50s and have travelled extensively for years.”
“We now have way more in our retirement accounts than we are ever likely to need,” he added. Their taxable stock portfolio and tax-free savings accounts pale in comparison.
Their combined income consists of Kurt’s Canada Pension Plan benefits and withdrawals from their RRSPs – about $240,000 a year.
“We’d love to be able to pass $400,000 to $500,000 to our daughter to help her buy a house, but we can’t figure out the best way to accomplish that.”
Kurt has set aside most of this year’s stock market gains in cash-equivalent investments. The remainder of their RRSP investments generate more than $200,000 a year in “very safe dividends from top-tier holdings” that meet their needs very well.
We asked Ian Calvert, principal and head of wealth planning at HighView Financial Group in Oakville, Ont., to look at Kurt and Eloise’s situation.
What the expert says
Kurt and Eloise have done an excellent job building up their net worth and investable assets, Mr. Calvert said.
Having more than $4.8-million in combined RRSPs means two things, he said. First, they have been excellent savers, using most if not all their RRSP contribution room each year over a long period of time. Second, they stayed fully invested in equities over that time period, with an overweighting in financial stocks.
“An RRSP balance of this size is a great example of how effective a disciplined investment approach, compounding over a long period of time, can be.”
Kurt and Eloise would like to give their daughter a substantial down payment next summer or fall.
“To fund this gift, they have a few options to consider,” Mr. Calvert said. They have three different pools of investments, all with different tax implications upon withdrawal. The stock portfolio will be subject to capital gains, the RRSP assets will be fully taxed as income, and the TFSA will be tax-free.
How should Vince and Mindy wind down their $500,000 corporate account in retirement?
“They ask if taking $1-million out of their RRSPs, paying the tax and netting $500,000 is the best approach,” the planner said. “This option would absolutely come with the highest income tax payable.” They would report income of $500,000 each. About half of this income would be taxed at the top marginal tax rate of 53.53 per cent.
“A better approach would involve avoiding that top marginal tax bracket altogether, while still providing flexibility for their future retirement years,” Mr. Calvert said. They have two other options to consider, he said. The lowest taxes payable on the gift would be if they used their non-registered stock portfolio and TFSAs. The combined value is about $440,000.
Tax would be payable on the capital gain from liquidating the stock portfolio. The stock portfolio is $283,000 with a book value of $123,000, so the capital gain would be about $160,000, of which $80,000 would be taxable income. “This would be the best approach if their goal is to provide the gift while triggering the lowest taxes payable.”
With year-end approaching, they could sell half the non-registered portfolio in 2025 and half in 2026, Mr. Calvert said. This would spread the capital gain over two calendar years.
“Although this option would raise the funds with the lowest amount of tax, the downside is it would limit their future flexibility,” the planner said. They would be left with only registered retirement funds, so all future withdrawals would be taxable. They’d have no source of tax-free funds.
“In other words, if a large or unexpected expense came up, they would have only taxable funds or the equity in their house to draw from, and the latter option would come with an interest expense.”
A second option is not to use their TFSAs for the gift at all. This would result in higher taxes on the withdrawal, but it would maintain flexibility for themselves, Mr. Calvert said. If they used the $283,000 from their non-registered portfolio, they would each need to withdraw about $265,000 from their RRSPs or registered retirement income funds to satisfy a gift of $440,000, plus $150,000 of after-tax personal spending, the planner said.
Both the capital gains and the additional RRIF withdrawals could be split between the calendar years 2025 and 2026 to keep their taxable incomes from exceeding $258,482, the 53.53-per-cent marginal tax rate, in either year.
“They would still have a one- or two-year spike in their taxable income, but they would avoid the top tax bracket and their TFSAs would be preserved for future use.”
If they do decide to liquidate their portfolio in 2025, they should keep the funds in high-interest savings until they give the gift in 2026, Mr. Calvert said. The interest income would be modest but the money to be gifted won’t be subject to any short-term volatility in public stock markets.
Lastly, given the size of their RRSPs, they should both convert them to RRIFs and take at least the minimum annual withdrawal, the planner said. Based on the size of the accounts, the minimum withdrawals would be about $140,000 a year for him and $75,000 for her. After income splitting and adding Kurt’s CPP, their taxable incomes would be about $118,000 each, or at the top of the 32.79-per-cent combined marginal tax rate.
“At this rate of withdrawal, and earning an estimated 5 per cent a year, they would still have a large balance of RRIF assets later in life,” the planner said – about $3-million when Kurt is 90 and Eloise is 85.
“These assets will be taxable as income on the final tax return of the last surviving spouse.”
They could consider accelerating the withdrawals beyond the minimum, but they will never be in a low tax bracket throughout their retirement, he said. If they do decide to withdraw more, “the ideal plan would be to keep their taxable income at $140,000 a year or less each and put the surplus funds into their TFSAs.”
How should Sid, 55, and Sherry, 46, draw down retirement savings given their age gap?
Client situation
The people: Kurt, 69, Eloise, 64, and their daughter, 40.
The problem: How best to free up enough cash to give their daughter money to help buy a first home.
The plan: Weigh the alternatives. To preserve flexibility in the future, consider leaving the TFSAs intact and instead cashing in the stock portfolio and withdrawing the rest from their RRSPs over two years.
The payoff: A better understanding of the alternatives.
Monthly after-tax income: $15,360 or as needed.
Assets: Cash $14,000; $1,500,000 primary residence; $283,000 in a non-registered stock portfolio; combined TFSAs $154,000; his RRSP $2,932,000; her RRSP $1,935,000. Total: $6.8-million.
Monthly outlays: Condo fees $1,200; property tax $450; home insurance $80; electricity $150; transportation $1,070; groceries $1,750; clothing $350; gifts, charity $1,000; vacation, travel $1,000; helping parents $3,550; dining out, drinks $1,650; entertainment $750; sports, hobbies $500; subscriptions $50; doctors, dentists $1,000; drugstore $500; communications $310. Total: $15,360.
Liabilities: None.
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