Reasons to consider early RRSP and RRIF withdrawals + MORE Oct 24th

The last 18 months have been tough on everyone, especially small business owners. Many entrepreneurs were forced to either shut down or pivot their companies during the pandemic, and brick-and-mortar stores stood empty due to lockdowns. According to a BMO report, employment at companies with fewer than 100 workers dropped by more than 20 percent, and an unprecedented 387,000 Canadian businesses closed during the first six months of 2020.“Main Street businesses across the country have by and large been in a fight for survival—smaller businesses have recorded almost double the rate of job losses as mid-sized and large firms,” says Mike Bonner, Head of Canadian Business Banking at BMO. “Knowing how important these businesses are to local communities and to our country’s economy, governments and other partners—BMO included—have stepped in to help them find ways to adapt and make real financial progress.”

Multiple levels of government stepped in to provide support through wage and rent subsidies as well as interest-free business loans to ensure that bricks-and-mortar independent businesses survived…

If you’ve never heard of the Rule of 30, welcome to the club. You may be hearing about it more though. This month, retirement expert and semi-retired actuary Fred Vettese is publishing a new book: The Rule of 30: A Better Way to Save for Retirement (ECW Press, 2021). 

I thought initially this new rule sounded familiar: Back in 1998, another actuary, Malcolm Hamilton wrote the foreword for my co-authored book, The Wealthy Boomer, which talked about the Rule of 40, as it applied to mutual fund fees. The Rule of 30, however, is quite different. 

In a nutshell, the 30 idea is a rule of thumb financial planners can use to guestimate how much young couples starting off on their financial journeys need to save for retirement. Rather than state something like save 10%, 12% or 15% of your gross (pre-tax) income each and every year, The Rule of 30 views retirement saving as occurring in tandem with daycare and mortgage repayment. 

From the get-go, Vettese suggests young couples allocate 30% of their gross or after-tax income to those three major expenses: Retirement savings, daycare costs and mortgage payments…

Workers contribute to their registered retirement savings plans (RRSPs) during their working years, with the hope of paying a lower tax rate on withdrawals than the tax rate they save when contributing. Even if the tax rates are similar, there can be a benefit to the tax deferral and compounding of investment income over the years. Contributors who pay more tax on withdrawals than they save on their contributions may not come out ahead, so low-income workers may be better off by not contributing to a RRSP.

Converting RRSP to RRIF and withdrawals for both

A RRSP is generally converted to a registered retirement income fund (RRIF) before December 31 of the year an account holder turns 71, but it can be converted at any time. RRIFs have mandatory minimum withdrawals based on a percentage of the account value at the end of the previous year, with the first withdrawal no later than age 72. 

You can withdraw from an RRSP at any time. Some young people take withdrawals well before retirement to buy a home or pay for post-secondary education under the Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP)…