Before I give you my thoughts, I have to ask: What is your real goal? Is it to have your estate pay less tax, or is it to maximize the amount of wealth you leave to your beneficiaries? If you want to minimize tax in the estate, you could leave it to charity or spend and/or give it away before you die.
I get the sense from your questions, though, that you want to try to maintain the value in your RRIF and pass it on to your beneficiaries, losing as little to tax as possible. One potential outcome, though, is that you live a long and healthy life in retirement and you naturally draw down on your RRIF. In this scenario the tax won’t be the issue you think it may be.
The 50% tax loss myth
Like you, I often hear that when you die you will lose 50% of your RRIF. It’s possible to lose 50%, but as an Ontarian you would need about $1,260,000 in your RRIF, assuming that is your only income at death, to owe 50% tax. Remember, we have a progressive tax system. If you have $300,000 in your RRIF, you would only lose 38.7% even though your marginal rate is 53.53%. If you had $500,000 you would pay 44.6%, again with the same 53.53% marginal tax rate. (Read about Canada’s tax brackets.)
One approach to saving tax that can work is to draw extra money from your RRIF and maximize your tax-free savings account (TFSA). But you’ve already maximized your TFSA, which is why you are thinking of adding to your non-registered account. Plus, I suspect you have a non-registered portfolio which you are using to top up your TFSA.
The main reason your proposed strategy may not work is because of tax-free compounding within the registered retirement savings plan/RRIF, which is a huge but often unrecognized benefit. Plus, there is the smaller tax benefit of being able to name a beneficiary on your RRSP/RRIF, thereby avoiding the estate administration tax.
Withdrawals will cost you in other ways
Think about what’s going to happen when you pull money from your RRIF to invest in a non-registered investment. You will sell an investment, withdraw the money and pay tax, leaving you with less money to invest than you drew out.
In addition, the extra RRIF money you draw may impact your Old Age Security (OAS), and it will increase your average tax rate. When you reinvest the money in a non-registered account will you purchase guaranteed investment certificates GICs, dividend-paying stocks, or a deferred capital gains investment? Each type of investment has different annual tax implications eating into your long-term gains. The annual dividends/distributions may even affect some government programs. Also, you can’t pension-split annual interest/dividends/distributions with a spouse.
Finally, upon death there may be capital gains tax to pay, and you will have estate administration taxes (probate) to pay in most provinces. It is for those reasons that I find it often doesn’t make sense to draw extra from a RRIF to add to a non-registered or non-tax-sheltered investments.
