Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment tips and stock market advice. Each Investor Toolkit update gives you a fundamental piece of investment advice, and shows you how you can put it into practice right away.
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Today’s tip: “Converting your RRSP to an RRIF is clearly the best of three alternatives at age 71 and there are four ways to make sure that you get the maximum benefit from the RRIF.”
If you have one or more RRSPs (registered retirement savings plans), you’ll have to wind them up at the end of the year in which you turn 71.
When you do, you’ll have three main retirement investing options:
You can cash in your RRSP and withdraw the funds in a lump sum. In most cases, this is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income.
You can convert your RRSP into a RRIF (registered retirement income fund).
RRIFs are the best retirement investing option for most investors
Converting to a RRIF is the best retirement investing option for most investors. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal.
Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert — you just transfer them to your RRIF.
When you hold a RRIF, you must withdraw a minimum each year and report that amount for tax purposes. (You may withdraw amounts above the minimum at any time.) Revenue Canada sets your minimum withdrawal for each year according to a schedule that starts at 7.38% of the RRIF’s year-end value at age 71, reaches 8.75% at age 80, and levels off at 20% at age 94.
Here are four retirement investing tactics for making the most of your tax savings when you convert your RRSP to a RRIF:
1. Use a younger spouse’s age to set a lower minimum withdrawal: For example, if your spouse is 65 when you turn 71, then the minimum withdrawal set by Revenue Canada is 4.00%, rather than 7.38%. The rate increases yearly until it reaches 7.38% when your spouse turns 71. It then follows the normal schedule, reaching 8.75% when your spouse reaches 80, and levelling off at 20% at age 94.
2. Stick with late-in-the-year payments: You start making withdrawals from your RRIF in the year following the year in which the RRIF is established. For example, if you open a RRIF in 2013, you have to make your first withdrawal by December 31, 2014.
You can receive RRIF payments on any schedule, though most investors receive them either monthly or yearly. Unless you need monthly payments to live on, it’s best to request only one payment per year, near year-end, to prolong your tax deferral. For practical purposes, however, set a date such as December 15 to allow for delays. Just contact the broker or institution that holds your RRIF to set up your yearly payment. (If you are a portfolio management client of Successful Investor Wealth Management, we can arrange this for you.)
3. Withdraw shares instead of cash: Keep in mind that you don’t need to make your minimum withdrawal in cash. Instead, you may make an “in-kind” withdrawal of shares instead of cash.
4. Name a RRIF beneficiary: Assets in a RRIF automatically pass on to your beneficiaries in the event of your death. If you name your spouse or a financially dependent child under 18 as beneficiary, assets are passed on tax-free to their RRIF or RRSP.
Account for withholding tax when withdrawing more than the minimum requirement
Note that when you make a RRIF withdrawal above the minimum requirement, Revenue Canada requires your financial institution to withhold tax at the time of withdrawal. Tax is withheld at the rate of 10% for amounts up to $5,000, 20% up to $15,000 and 30% on $15,001 and up.
The tax on your RRIF withdrawal may be more or less than the amount withheld. You’ll have to report the full withdrawal as income and pay tax at ordinary rates. But you’ll get a credit against taxes owing for the tax that is withheld.
COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members
Do you invest differently inside your RRSP than outside? How well have you done in your RRSP/RRIF investing compared to your results in non-registered investments?
Note: This article was initially published on May 27, 2010.
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