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RRIF is similar to an RRSP in that investments inside the RRIF can continue (to grow) and defer taxes until monies are withdrawn,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.
- 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.
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”:
- 10% if the payment is not more than $5,000;
- 20% if the payment is more than $5,000 but not more than $15,000; and
- 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?