The RRIF Meltown
Meltdowns don't just happen at nuclear plants!
A RRIF Meltdown is a strategy advisors offer to investors searching for ways to avoid paying taxes on the money they're taking out of their RRIF. Sounds like a good idea… but is it? Too often advisers pick up on a strategy and then try to apply it to all of their clients regardless of their individual situation.
So, just what is the RRIF Meltdown?
When you die the taxman looks at everything you own and wants to collect tax on whatever he can. If you don't leave your RRIF to your spouse when you die, then every dollar left in your RRIF gets added to your income for tax purposes. The impact of that will likely push your income into the highest tax bracket on your final tax return or about 46%.
The Meltdown strategy in its simplest form assumes you pay less tax now; therefore if you take money out of your RRIF earlier you can ultimately reduce the tax you pay on the withdrawals.
Analysis shows us that this strategy can work BUT is highly dependent upon several factors:
- Your tax rate should be 15% lower now than at death.
- Your income should be less than $69,562 when including the Meltdown income.
- If you feel you'll live for another 20 years… pass on the Meltdown.
Aggressive Meltdown strategies will have you borrow money to invest, pay interest, and offset the income drawn from your RRIF with these interest costs to ensure you are paying less tax on your RRIF withdrawals.
It's aggressive because you've BORROWED money at a time of your life when it is best to not have any debt.
Interestingly enough, the more conservative your investments are, the better the Meltdown strategy can work. That's why it appears attractive to conservative investors. But you should never be lured into a RRIF Meltdown without considering:
- tax rates and rules changes
- how it would impact taxes and lifestyle in your individual situation
- the impact of an interest rate increase on borrowed money
IF you're considering a RRIF Meltdown we can help you understand the risks. If you want to learn which tax strategies are suitable for you, talk to us. That's what we do.