Lump Sum vs Annuities

markjhamilton · Post by **markjhamilton** » Sun Mar 01, 2015 3:42 pm

My wife and I are US Residents with RRSPs in Canada. I know if we take lump sum withdrawals there will be a non-resident 25% withholding tax, but I believe if we convert to an annuity the withholding tax will only be 15%. Are there any restrictions on the term of the annuity or do our ages (58) have any bearing on our ability to convert the RRSPs? We want to do this soon and with a shorter annuity period as we have a lot carryover unused foreign tax credits that will expire in the next 3-4 years and we can use them to cover any US taxes over the 15%. The only other income we have in Canada are company pension payments. Thanks.

nelsona · Post by **nelsona** » Sun Mar 01, 2015 9:48 pm

Annuities will be taxed at 15%, as long as they are structured over the period required. You can ask the salesman what those terms are.

But, just to let you know, that unless your EFFECTIVE tax rate in US is over 15%, you won't be getting to use the old carry forward in any event. You pretty much have to resign yourself to the fact that those past credits are lost.

Annuities are not a great buy these days, so converting to RRIF and taking 10% a year would accomplish the same goal of 15% withdrawals without the poor returns (and locked-in investment) of annuities.

The best way of using old carry forwards is to generate some Cdn-source general limit income that is 0% taxed in Canada. That would be like short-term employment, contract work and -- most likely for you -- CPP/OAS payments.

Taking CPP at 60 might be a good idea.

nelsona · Post by **nelsona** » Sun Mar 01, 2015 9:52 pm

Remember, your credits are used at your EFFECTIVE rate, while the income is taxed at your marginal rate. Effective tax rate for 15% MFJ would be in the 130K range.

markjhamilton · Post by **markjhamilton** » Sun Mar 01, 2015 10:45 pm

Thanks for the quick response and great advice nelsona. My effective tax rate is over 15%, but only by a few points so I would have trouble using all of my tax credits. I'll look into the CPP option (which I never thought of). One question - would 10% a year withdrawal from a RRIF qualify for 15% WHT? I thought that might be considered a series of lump sum withdrawals and be subject to 25% WHT.

Regards,
Mark

nelsona · Post by **nelsona** » Mon Mar 02, 2015 7:00 am

Yes, 10% from RRIF is considered periodic, and 15% should be withheld.. That is the definition.

Note, that the periodic RRIF withdrawal will only be considered in the year AFTER you create the RRIF. There is some debate on that but some firms hold to this.
So if you want to start this in 2016 you need to convert this year.