Converting your RRSP to a RRIF? Consider this…

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.

If you are converting your RRSP to a RRIF – make sure you know the facts and consider these things.

RRSP to RRIF? Consider this!

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:

1. 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).
2. You can purchase an annuity (but I don’t think these products are needed for everyone).
3. 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RRIF is similar to an RRSP in that investments inside the RRIF can continue (to grow) and defer taxes until monies are withdrawn,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.
• RRIF payments after age 65 qualify for the pension income tax credit.  This applies to the first $2,000 of pension income on a tax-free basis.  Also, income-splitting rules allow taxpayers to split up to 50% of eligible pension income with a spouse or common-law partner.

Let’s go through a host of Q&A about converting your RRSP to a RRIF.

Converting your RRSP to a RRIF?  Q&A

RRIF 101 – What is a registered retirement income fund (RRIF)?

A RRIF is one of the options (see above) you have when you convert your registered retirement savings plan (RRSP) or your employer’s registered pension plan (RPP) to an income plan in your retirement years. Within a RRIF, your investments can continue to grow on a tax-deferred basis, while you receive a regular stream of income through the withdrawals you are required to make annually from the plan.

On a personal note, I intend to convert my RRSP to a RRIF only when RRSP assets are left at the end of the year I turn age 71. 

Read on for more details in My Financial Independence Plan.

My Financial Independence Plan

Can I transfer money from a regular savings account into my RRIF?

No, you cannot transfer money from a regular (non-registered) account into your RRIF.

What happens to my RRIF when I die?

The funds in your RRIF become part of your taxable income on the date of your death and are included in your final tax return. There are several potential tax-deferral strategies that can reduce your taxes at death; for example, if the beneficiary of your RRIF is a spouse or child/grandchild under 18 who was financially dependent on you at the time of your death. In those cases, the funds in your RRIF may be transferred to their RRSP or RRIF, or used to purchase an annuity.

I would encourage you to consider this pillar post on my site about beneficiaries to be tax efficient:

Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts

Must I convert my RRSP to a RRIF at age 71?

Nope, you can do it beforehand!

However, in the year you turn 71, you must convert your RRSP to an income option such as a RRIF or an annuity. Like I mentioned above, you can also cash out your RRSP, however the entire amount is considered taxable income in the year you withdraw it, and the funds no longer benefit from tax-sheltered investment growth.

Personally, I wouldn’t do that unless your RRSP to RRIF balance is very low. 

Can I convert my RRSP to a RRIF before I turn 71?

Of course!

You can convert your RRSP to a RRIF before age 71 if you need to draw income from it. If you withdraw funds from your RRIF that exceed the minimum annual payment there will be withholding tax on the excess amount.

Are there any RRIF downsides?  For sure:

• When you withdraw more than the RRIF minimum requirement, our friends at Canada Revenue Agency will require your financial institution to withhold tax at the time of withdrawal.  A payment from a RRIF in excess of the minimum amount is subject to tax deductions “at the source”:

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.

Notes: Residents of Québec also pay a provincial sales tax of 15% in addition to the federal withholding tax. If you are a non-resident of Canada, you will pay a 25% withholding tax rate, regardless of the size of the withdrawal. See our Canada Revenue Agency (CRA) for more details!

• 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?

How does withholding taxes work, come “tax time’?

RRSP withdrawals count as income, so you’ll have to declare that income come tax time.

If the RRSP withdrawal ends up putting you in a higher tax bracket, you’ll have to pay more income tax, since the withdrawal tax likely won’t cover the full amount of income tax you’ll owe.

When you withdraw from your RRSP, your financial institution will provide a T4-slip (T4RSP slip) showing the amount you withdrew, and how much tax was withheld. You must declare this amount on your T1 (General Income Tax Return) in the calendar year you withdrew it.

So, essentially, the withholding tax is some assurance the government gets their money back 🙂

Is there a minimum amount needed to set up a RRIF?

Nope. There is no minimum amount to open a RRIF although it would make sense to convert any RRSP assets to a RRIF if you have meaningful assets/income to drawdown.

Can I have a RRIF and an RRSP?

Yes. However, again until the end of the year you turn 71, you can choose to have both an RRSP and a RRIF. Once you turn 71, however, you must convert your RRSP to a RRIF or other retirement income option.

Personally, I think it becomes a bit “busy” to have both but I know other investors feel differently. 

Can I have more than one RRIF?

Yes. Just like you can have more than one personal RRSP, you can have multiple RRIFs. Keep in mind, the more income streams you have the more complex it may be to track.

Mark, I have a Locked-In Retirement Account (LIRA) with money transferred from a pension plan of a former employer. Can I convert this to a RRIF?

You can, but there are only special situations where that can occur.

I suggest you read this post for more details:

What is a LIRA? How should you invest in it?

What is a LIRA and how should you invest in it?

What happens to my investments in my RRSP when I convert to a RRIF?

They can simply rollover.

Your investments can be transferred from your RRSP “as is” directly to your RRIF without having to liquidate them. There are no tax implications either – as long as your transfer is direct and your assets remain in the RRIF.

What investments can I hold in my RRIF?

Same as your self-directed RRSP really: stocks, bonds, GICs, mutual funds and ETFs and cash.

How would any RRIF withdrawals work?

Starting in the year after you open your RRIF, you must withdraw a minimum annual amount from your RRIF, which is taxable as income.

Here is a good RRIF table to consider:

Source: https://www.woodgundy.cibc.com/en/reference/retirement-planning/rrif-minimum-withdrawal.html

This withdrawal amount is determined by the federal government using a calculation based on your age and the dollar value of your RRIF on December 31st. You can also check out one of my favourite sites Taxtips.ca for more details.

https://www.taxtips.ca/rrsp/rrifminimumwithdrawal.htm

Can I choose the frequency of my RRIF withdrawals?

Absolutely.

RRIF withdrawals may be made monthly, quarterly, semi-annually or annually. You can choose the frequency when you complete your application to open your RRIF.

Personally, I helped my parents recently with their RRIFs. We established their RRIF withdrawals each January and February. This way, money can compound throughout the year inside the RRIF and any money withdrawn early in the year can be used to fill up their Tax Free Savings Accounts (TFSAs) with any RRIF monies not needed for spending. 

Tax-smart!

Can I withdraw more than the annual minimum amount?

Of course you can – see above. However, any money beyond the RRIF minimum is subject to withholding taxes. Withholding taxes can differ depending on your province of residence. See notes above!

Can I base my RRIF withdrawals on my younger spouse’s age?

Yes, this is a very neat feature of the RRIF!!

You can use your spouse’s age to calculate your minimum withdrawal amount, thereby lowering your minimum amount and tax bill.

This is another smart tax-strategy if you have other sources of retirement income and want to keep your investments growing within your RRIF for as long as possible. 

Do I have to make RRIF withdrawals if I don’t need the money?

Yes, you do.

Now, like I mentioned above, if there is an unused portion of the funds you withdrew from your RRIF, you may choose to contribute the money to a TFSA (if you have the contribution room) or move that money to a taxable account for investing.

You cannot however move your RRIF payments directly into a TFSA.

Converting your RRSP to a RRIF summary

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?  What considerations did you make before making the switch?