RRSP - early withdrawls

Quotes from http://www.theglobeandmail.com/globe-investor/personal-finance/rrsp/how-early-withdrawals-can-reduce-the-rrsp-tax-hit/article2351732/

Jean Lesperance, the blogger at Canadian Financial DIY and HowToInvestOnline, is gradually “melting down” his RRSP in support of a semi-retired lifestyle. Still a few years younger than 65, he is also funnelling RRSP withdrawals into his tax-free savings account (TFSA) to have the flexibility to receive tax-free income that can augment or replace RRIF withdrawals later.

“That’s to keep me in the lowest possible tax bracket all along, and to minimize as much as possible the clawback of income from government programs such as OAS [Old Age Security],” Mr. Lesperance says. “If I can pay 20 per cent tax on $50,000 RRSP money instead of 30 per cent tax, that’s like a 10-per-cent return on my money. Taxes matter a lot.”

Low-income seniors with RRSPs may want to melt them down before 65 no matter what their tax rate is. It is unlikely to be as high as the clawback of the guaranteed income supplement (GIS): a dollar of RRSP income after age 65 snatches back 50 cents from the GIS, equivalent to a 50-per-cent tax rate.

Middle-income seniors can receive close to $20,000 in annual income tax-free thanks to the basic-personal, age, and pension-income tax credits on their tax returns (Lines 300, 301 and 314). If nondiscretionary retirement income (e.g. OAS, corporate pension) is less than this amount, the difference can effectively be withdrawn from RRSPs free of tax.

Retirees shouldn’t wait until 71 to open RRIFs and transfer in RRSP funds, advises Ron Watson, 68, of Thunder Bay, / who gives workshops on entrepreneurship and financial management. RRSP withdrawals are subject to transaction fees and tax withholding whereas RRIF withdrawals are not. Moreover, after 65, RRIF withdrawals are eligible for income splitting, and the pension income tax credit can be applied to the first $2,000 taken out every year.

An aggressive form of the meltdown relies on leverage to extract RRSP funds without incurring any or very much tax. It works this way: RRSP withdrawals are used to pay, in full or part, the interest on an investment loan in a non-registered account. Since the interest is tax deductible, it cancels out the taxes on RRSP withdrawals, in full or part.

A leading proponent is Garth Turner, the former member of parliament who blogs at Greaterfool.ca: “I plan to borrow a mess of money to invest in a nice, balanced portfolio, then use RRSP withdrawals to pay the interest on that investment loan. ... By the time 71 rolls around, the net effect is that I’ll have transferred wealth from one pre-tax pile to another after-tax one.”