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Converting your RRSP to a RRIF? Consider this…

In a recent post on my blog I covered my bias for winding down the Registered Retirement Savings Plan (RRSP) sooner than later, preferring to move assets from the RRSP to a non-registered account or better still a Tax Free Savings Account (TFSA) before you’re forced to.  As part of the RRSP primer I wrote here, you already know that if you have one or more RRSPs you’ll be required to shut those accounts down at the end of the year you turn age 71.

If you’re in that position or you’re getting close to that age here are some considerations for you:

  • You can “cash in” your RRSP (but I don’t think that’s a great idea since you’ll be taxed on the entire withdrawal).
  • You can purchase an annuity (but I don’t think these products are needed for everyone).
  • You can convert your RRSP into a Registered Retirement Income Fund (RRIF).

I suspect converting your RRSP to a RRIF may be a good choice for many investors because of these reasons:

  • A RRIF is similar to an RRSP in that investments inside the RRIF can continue (to grow) and defer taxes until monies are withdrawn,
  • You can keep your portfolio allocation and assets intact upon establishing the RRIF account,
  • You can use your (younger) spouse’s age to set a lower RRIF minimum withdrawal requirement,
  • You can leave RRIF assets to beneficiaries,
  • You can receive RRIF payments on any schedule, for example, providing pension-like monthly income, and
  • You can defer RRIF minimum withdrawals until the year after the RRIF was opened.

Are there any RRIF downsides?  For sure:

  1. 10% if the payment is not more than $5,000;
  2. 20% if the payment is more than $5,000 but not more than $15,000; and
  3. 30% if the payment is more than $15,000.
  • Once a RRIF is established, there can be no more contributions made to the plan nor can the plan be terminated except through death.  How is that for final?

There is no requirement to keep your RRSP until you turn age 71 nor is there any requirement to wait until age 71 to open a RRIF, options abound.  I would however suggest you talk to a financial professional if you are unsure how best to manage your RRSP investments so you’re making the best short-term and long-term decisions possible.

Are you considering rolling over your RRSP to a RRIF?    Have you already done this?  What considerations did you have before making the switch?

Filed in: Retirement, RRIF, RRSP

24 Responses to "Converting your RRSP to a RRIF? Consider this…"

  1. We plan on converting our RRSPs to RRIFs way down the road. I’m comfortable with the source deductions since it will all balance out as long as our marginal tax rates are reasonable. And as you’ve mentioned before the minimum withdrawal percentage steadily grows with age past 71. We plan on spending as much as we can once it is converted to a RRIF – I’d rather spend it than let CRA have it :)

    Cashing in an RRSP would only make sense for a select number of people/situations and would likely only be for a financial emergency.

    • Mark says:

      Thanks for the comment Dan. I suspect I will do both, keep some RRSPs > RRIF and wind down RRSPs I don’t intend for a RRIF.

      I’ll have to do the math in another 30+ years, but this is my thinking for now with current tax structure and financial accounts.

      When you factor in inflation, all investors would be hard-pressed to yield over 7% to keep their account growing at age 71, fighting inflation. Inflation is a portfolio killer. Definitely spend it vs. CRA get it!

  2. GCAI says:

    Hi Mark,
    this is a combination response to this post and the recent Cha-Ching! one.

    Further to the response by Don in the Cha ching post about converting a portion of RRSP to RRIF to take advantage of the pension income deduction (note to self made in calendar to do so:) the amount converted should be about $50,000 to avoid “the deduction at source” of amounts over the minimum withdrawal as noted in this post.
    i.e. at age 65 minimum withdrawal is 4% hence 4% of 50,000 is $2000 and so on.
    This would avoid the tax owed (if any) being tied up until the next tax return by being withheld at source (read “free loan to government”).

    • Mark says:

      Hey GCAI,

      Thanks for the great comment and other reminder: take advantage of the pension income deduction! Free government loans are good and rare :)

      • GCAI says:

        Yes absolutely!

        and further reading the CRA link above one should avoid any systematic withdrawals from RRIFs where the aggregate amount exceeds the minmum withdrawal amount – rather take ad hoc withdrawals of $5000 or less to keep the withheld tax to 10% – note however that you may owe more tax at filing time but I’d rather have the $ in my pocket and owe them until tax time, than the $ being in the government’s pocket.

        • Mark says:

          Thanks GCAI. Not sure I would personally withdraw from RRIF more than min. forced amount but I could see some retirees doing just that if they didn’t know the consequences.

          Those withholding taxes are steep, for RRSPs and for amounts over RRIF minimums!

  3. I’m not sure what all of this will look like when I turn 71 in 2060, but I find these posts helpful. Even if the landscape changes drastically by the time I’m there, it’s still good to know these considerations.

  4. Cory Papineau says:

    One thing I advise my clients too is that not all money needs to be converted from an RRSP to RRIF at once.

    As mentioned in the comments you may want to convert some to get the benefit of the pension credit but some just may want to average out their income between retirement and 71 when they are required to convert the remaining funds into an income stream.

    At 72 in the first year of withdrawal you will be required to take out 7.48% of the balance so that is $7500 for every $100K in your RRSPs.

    If you have $500 000 saved that means $37500 in income. You may want to consider “melting down” your RRSPs/RRIFs before then to average out tax liabilities.

    Even taking out a few thousand each year can have a positive impact on your tax situation. If you don’t need the capital use this as your TFSA contribution each year!

    • Mark says:

      Thanks for the great comment Cory.

      What about this plan:

      1) Age 65, move about $12,000 from RRSP to RRIF and withdraw $2,000 per year from RRIF tax-free.
      2) Age 71, six years later, forced to move RRSP to RRIF, move $25,000 to RRIF and withdraw 7.48% or almost $1,900. That would be tax-free.

      Thoughts?
      Mark

      • GCAI says:

        Mark
        if you only move $12,000 at age 65 you’ll be hit with withheld tax at 10% on $1520 of the $2000 you take out in the first year (and progressively more in following years assuming there is no growth in the RRIF) – yes a small amount but still niggling
        On the flip side if you move 50,000 or so as I suggested earlier you could be forced to take more than 2,000 if you get more than 4% growth inside the RRIF

        • Mark says:

          Thanks for writing back GCAI.

          I thought moving from RRSP to RRIF, there no are fees and there are no withholding taxes – only when you go above RRIF minimum withdrawals do withholding taxes apply. Are you sure? :)

          Of course with no RRIF in place, withholding taxes apply for RRSP withdrawals.

          This is why if you’re going to use a RRIF, it’s probably best to take out as little as possible, the minimum forced withdrawals.

          For most folks then, RRSP > RRIF at age 65 is likely best: you get the pension tax credit and income withdrawn is eligible for pension-splitting.

          At age 65, minimum withdrawal = 4% and you get the benefits above.
          Age 66 = 4.17%…

          A lot less than forced to withdraw almost 7.5% a few years later, potentially in a higher tax bracket.

          • Gcai says:

            I would think the minimum withdrawal amount is based on the value of the RRIF so if you move 12,000 at age 65 the minimum withdrawal would be 4% of 12,000 = 480 hence withholding tax on the remaining 1520 to make up the 2000 eligible for the pension income credit – you get it back but it still niggles :)

          • Mark says:

            The minimum withdrawal is predefined so yes, in part, it is based on the value of investments in the RRIF.

        • Mark says:

          I see your point, since if you take out more than the RRIF minimum, then withholding taxes apply even if the first $2,000 from the RRIF is essentially tax-free thanks to the pension tax credit.

          Better off moving close to your $50,000 from RRSP to RRIF at age 65, if seniors don’t need it beforehand.

  5. Chris says:

    I have withdrawn more than the minimum RIF amount and paid withholding tax. I’m trying to understand the downside. I owe the tax, if I wait until the end of the year to take it out the government has it for 4 months but I have the rest to spend or invest. I also have the benefit of income splitting with my wife. I have the feeling that it makes sense to draw down the RIF while we can, there are no guarantees that we both will be around to split income.

    • Mark says:

      Hey Chris,

      There may not be that much downside and yes, if withdrawn at end of year (which is a good strategy for any RRIF), then you have a few months until taxes are due in April.

      Everyone’s financial situation is different and if you’re a position to spend a healthy RRIF, count yourself one of the lucky ones.

      Thanks for your other point of view.

      • GCAI says:

        Hey Chris and Mark
        yes if you making withdrawals from a RRIF above the required minimum amount then year end is a good time to do that however for minimum withdrawal amounts (and below), earlier would be better (ie. there is no withheld tax) and put the money (or part of it) into your TFSA (if you require sheltering) or invest it in non-registered account or consume it (I like this one:).

        if you leave the money in the RRIF it will growth (one hopes) but that makes the next withdrawal amount larger.

        As you stated Mark everyone’s situation is different so one size does not fit all.

      • GCAI says:

        PS to last comment

        Does anyone know when (point in time) the RRIF is valued to determine the minimum withdrawal amount? I hope it’s a fixed point like January 1 of the the year.

  1. […] you missed it, this week I shared my January 2014 Dividend Income Update and I also wrote about some considerations when moving your RRSP to a RRIF.  Many of these RRSP and RRIF elements will be top of mind for me later this year when I sit down […]

  2. […] You don’t have to start a RRIF when you retire but you must collapse your RRSP in the year you turn age 71, so rolling RRSP investments into a RRIF is one option for you. […]

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