Switching your RRSP to RRIF is best for those retiring soon

RRSP-to-RRIF

If you turned 71 in 2016, you’ll need to close out your RRSP before the year end. Make the right choice with the conversion to a 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. We think converting your RRSP to a RRIF (registered retirement income fund) is the best option for most investors. You 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 purchase an annuity.
  • Proceed with the RRSP to RRIF conversion

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RRIFs are the best retirement investing option for most investors

Converting your RRSP to 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. One convenient thing to note about the RRSP to RRIF conversion process is you don’t need to sell your RRSP holdings when you convert — you simply 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 5.28% of the RRIF’s year-end value at age 71, reaches 6.82% at age 80, and levels off at 20% at age 95.

Here are four retirement investing tactics for making the most of your tax savings when undergoing the RRSP to RRIF conversion process:

    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 5.28%. The rate increases yearly until it reaches 5.28% when your spouse turns 71. It then follows the normal schedule, reaching 6.82% when your spouse reaches 80, and levelling off at 20% at age 95.
    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 2016, you have to make your first withdrawal by December 31, 2017.

You can receive RRIF payments on any schedule, though most investors choose to 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.

  1. 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.
  2. 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 if too much tax is withheld.

For investors turning 71 the RRSP to RRIF conversion process makes the most sense for investors that would like to live off their retirement income.

This article was first published in February 2016 and is regularly updated.

Do you invest differently inside your RRSP than outside? Did you find the RRSP to RRIF conversion process smooth? How well have you done in your RRSP/RRIF investing compared to your results in non-registered investments?

Comments

  • Patricia F.

    As usual, I find this a very helpful and informative article. I was unaware that I could withdraw shares instead of cash. If I did so, would I deposit them into an unregistered account? Thank you.

    • Patricia,

      You can make a withdrawal in kind from an RRSP or RRIF into a non-registered account if there is no change in beneficial ownership, and if the two affected accounts are held at the same financial institution.

      Fees may apply for a withdrawal in kind from an RRSP, but no fees will apply for a RRIF.

      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. So you may have to withdraw some cash, in addition to your withdrawal in kind, to let your financial institution withhold the necessary taxes. Thanks.

  • Not really clear why this conversion is “the best investing option for most investors” after reading this article – which appears to be its premise.
    Don’t see a compelling argument being made here.

  • An excellent article. It should help a lot of people. I take a slightly different approach to withdrawals. My first withdrawal is early in the year to top off our (spouse) TFSA accounts. If left in RRIF gains in the year would be taxable if drawn late in the year. My second withdrawal from my RRIF is to pay my tax bill on April 30th. If I need income throughout the year it comes from my TFSA. I’d like your comments on the early withdrawal to top up TFSA.

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