Will I have too much money?

It’s RRSP season and that means many of us are spending extra time thinking about our financial futures. Maybe this time of year has you feeling overwhelmed with questions… questions like ‘what should my financial priorities be right now?’, ‘what type of registered savings account should I have?’ and ‘how can I maximize my contribution this year when I’ve got less savings to work with?’. Really, all these questions are indicative of a larger, overarching concern: ‘will I have enough?’.

These questions, daunting as they may be, have answers – strategies, in fact, that financial advisors share with clients to ensure they’re on track to achieve their goals. And while the strategies may differ, the underlying principle is the same: save, save, save in the present to ensure some level of stability/comfort in the future. We spend so much time wondering about not having enough though, that we don’t really consider what to do if we end up with ‘too much.’

Now, before you laugh at the idea of having ‘too much’ money come retirement, consider the following situation. A couple heeds their advisor’s advice early on in life and maximizes their yearly RRSP contributions throughout their working career. When the time comes, they retire with healthy pensions – ones large enough to cover the bulk of their living expenses. Through the years, the couple made budgeting and saving a priority and as a result, successfully managed to live within their means. Now in retirement, the couple finds themselves used to living a certain lifestyle and realizes they can continue to live comfortably for the rest of their lives without really needing a portion of their registered savings. Using the financial planning process, their advisor confirms they have ‘extra’ assets and suggests an alternative option to simply leaving it behind: making a charitable donation.

For the purposes of this example, let’s say the couple can either do one of two things:

1. Do nothing with the extra registered assets

• At retirement, the couple has $300,000 in an RRSP (with a 3% growth rate) they aren’t going to use to support their lifestyle.
• An RRSP must be converted to a RRIF at 71 which means they will be required to take a yearly income of $15,000. This income is charged at a 30% tax rate so the couple nets $11,000 of (superfluous) income per year.
• Let’s say the remaining spouse passes away at age 90 with $127,000 left in the RRIF. After taxes, the net estate value is $65,000.
• When we consider the $4,000 in taxes lost every year for 20 years and the $62,000 in taxes lost at the disbursement of the RRIF, that’s a total loss of $142,000 to taxation.

2. Use a charitable tax credit to offset taxes after death

• At retirement, the couple has $300,000 in an RRSP (with a 3% growth rate) they aren’t going to use to support their lifestyle.
• At 65, the couple buys a $320,000 permanent life insurance policy and designates a charity of their choosing as the beneficiary.
• At 65, they also convert their RRSP to a RRIF. The $13,000 yearly income is charged at a 30% tax rate so the couple nets $9,000 of (superfluous) income which they redirect to fund the insurance policy.
• Let’s say the remaining spouse passes away at age 90 with $123,000 left in the RRIF and $55,000 in taxes owing on the balance of the account.
• After 25 years of paying premiums on the $320,000 permanent life insurance policy, the death benefit has grown to $467,000.
• The $467,000 insurance death benefit is disbursed (tax free) to the beneficiary – a registered charity of choice – resulting in a tax credit of $216,000.
• The $123,000 in the RRIF account transfers to the estate and the taxes are offset by the tax credit from the insurance policy donation.
• The net estate value is the full $123,000 plus the remaining tax credit of $161,000 ($216,000 less $55,000) which is available to cover other taxable assets in the estate.

While the idea of having ‘too much’ money in retirement may seem laughable to many of us, it is a realistic outcome that must be accounted for in the financial and estate planning processes. The above example illustrates just one of the many strategies used to help offset the tax burden after death. If you have questions about what to do with your registered assets or if you want to learn more about tax offsetting strategies, contact us today.