Tips for Efficiently Managing RRIF Withdrawals and Avoiding Hefty Penalties

 Registered Retirement Savings Plans (RRSPs) eventually have to be taxed as income once withdrawn. Often, after conversion into a Registered Retirement Income Fund (RRIF), a specific percentage must be withdrawn each year. Financial planners have various strategies to reduce taxes on RRIF withdrawals, especially when retired clients seek more income to meet rising costs due to inflation.

A recent example was a physician in his late 60s who was still working. In this situation, we would want him to incorporate his medical practice and retain his earnings within it, while drawing income to pay for living expenses from his RRSP, and later converted to a RRIF. In this case, the physician has reduced his RRSP balance, thereby reducing the income he would eventually take as RRIF withdrawals and building a hefty corporate investment account balance. This strategy gives him more control over how the money exits the corporation and reduces taxes paid on that income. Shifting money out of the RRSP has also reduced projected taxes due on the physician’s estate.

Planning around Old Age Security (OAS) clawbacks is critical when developing a retirement income plan. If clients need to withdraw more than planned from a RRIF at the end of the year, financial planners may advise they borrow from a line of credit to avoid initiating the OAS clawback and then repay the debt with a RRIF withdrawal in January.

Taking full advantage of someone’s marginal tax rate can be a way to reduce taxes on RRIF withdrawals over the long term. Instead of sticking to the minimum, advisors often suggest increasing withdrawals from a RRIF, so clients take out as much as they can at their current marginal rate. This approach is often more tax-efficient than deferring taxes as long as possible, only to pay the highest marginal rate as someone hits higher withdrawal minimums into their 90s or passes away with a large RRIF balance.

Planning for RRIF withdrawals starts when clients start contributing to their RRSPs. Throughout those wealth accumulation years, it’s critical to consider when and how much it makes sense to contribute with an eye toward future withdrawals. Financial planners also aim to smooth out a client’s income over time, which requires conversations about anticipated expenses and tax-triggering events. It’s a dynamic process, and advisors stay connected with clients to know when significant changes occur.


The Old Age Security (OAS) pension is a taxable monthly payment from the Canadian Government to eligible seniors over the age of 65.

Eligibility for OAS include the following:

  • You must be at least 65 years of age.
  • If living in Canada: You must be a Canadian citizen or legal resident and must have lived in Canada for at least 10 years since you turned 18.
  • If living outside Canada: You must have been a Canadian citizen or legal resident before you left Canada and must have resided in Canada for at least 20 years since you turned 18.

The current maximum monthly basic OAS payment as of the October to December 2021 quarter is $635.26. When your net income exceeds the income threshold set by the government, the OAS paid to you becomes subject to a clawback (or Recovery Tax as its officially referred to). The income threshold amount is updated every year. OAS clawback results in a reduction of OAS benefits by 15 cents for every $1 above the threshold amount and is essentially an additional 15% tax.

Ways to Minimize the OAS Clawback

  • Prioritize Your TFSAs
    • Income from savings and/or investment in a Tax-Free Savings Account (TFSA) is tax free. Ensuring you maximize your TFSA accounts will allow you to draw income as required without impacting the OAS clawback
  • Analyze Your Sources of Income
    • Income derived from non-registered accounts are treated differently for tax purposes. For example, interest income is fully taxable, while 50% of capital gains are taxable. If your investment income is taxable, then this could push you over the income threshold for OAS
  • Early RRSP Withdrawal
    • If you know that you will have lower periods of income before age 65, consider withdrawing funds before you start your OAS payments. Funds withdrawn from your RRSP can be re-invested in a non-registered account or a TFSA
  • Defer OAS/CPP
    • OAS payments can be deferred until age 70, which increases the monthly benefit amount by 36%. If you are planning to have higher income between the ages of 65 and 70, this will defer any clawbacks
  • Leverage Your Investing
    • If you borrow to invest, the interest paid may be deductible and lower your overall taxable investment income
  • Realize Capital Gains Early
    • If you are planning on making any large sales of property, consider doing this before age 65 ot 70
  • For Your RRIF, Utilize the Younger Spouse’s Age
    • This strategy will lower your annual withdrawal requirements and lower your overall net income for OAS calculations
  • RRSP Contributions
    • You can lower your taxable income by making contributions to your RRSP or your spouse’s RRSP if you are over 71, but they are younger. This will lower your taxable income
  • Income Splitting
    • Splitting of pension and other income such as Registered Retirement Income Funds (RRIF), annuity payments, and CPP pension sharing between spouses can lower individual income for either spouse and help them limit or avoid OAS clawbacks.