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:
- 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RRIF is similar to an RRSP in that investments inside the RRIF can continue (to grow) and defer taxes until monies are withdrawn,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.
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.
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?
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”:
- 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.
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 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:
|Age At Start Of Year||RRIF Minimum Payout Percentage|
|95 and older||20.00%|
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.
Can I choose the frequency of my RRIF withdrawals?
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.
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?
Mark – thanks for yoru time and efforts. Great read as usual . Is there any cost in converting an RRSP to a RIF ? I never knew about this . Question 1) I am 56 , and semi-retired now, so this would seem like a good idea . I have a RIF now, could I combine it with the RIF I just opened from a LIRA ?
Q 2) Once the RRSP is put into a RIF is there any costs in converting ?
Q3) Presuming it operates like a normal RIF ?, What happens if I want to contribute to a RRSP ( I think I can up to age 71?) and take the tax credits , do I open up another RRSP , or could I ?
Thanks for your insight and good study !
There shouldn’t be James.
I know there are no charges at TD Bank for example since my parents are going through this, this year. My Dad is 71 and must convert RRSP to RRIF. Although he waited to convert his RRSP to RRIF, you certainly don’t have to. You can convert at any age.
LIRA is different, it’s locked-in and therefore usually untouchable until at least age 55. Given you are 56, you should be able to “unlock” ~ 50% of your LIRA and move it to your RRSP. You would need to confirm that based on the terms and conditions of your former pension plan though.
Re: Once the RRSP is put into a RIF is there any costs in converting ?
Shouldn’t be but again, all brokerages are not created equal. I would ask around between TD, RBC Direct Investing, CIBC, BMO and others and see what they will or will not do since all fee structures are different and subject to change.
Re: What happens if I want to contribute to a RRSP ( I think I can up to age 71?) and take the tax credits , do I open up another RRSP , or could I ?
Consider an RRSP like a container in that you can put many different assets inside that container. You can have one or more containers (e.g., RRSPs) but that might complicate things since you have now many assets in many containers you have to manage. Based on my essays and experiences with many retirees they keep things simple as much as they can and have one RRSP or one RRIF in their name, one TFSA in their name, etc.
You can read some essays here:
You can absolutely contribute to your RRSP up until the year you turn age 71 but in that year you will be forced to collapse your RRSP to a RRIF or annuity or make withdrawals from said RRSP since that account structure cannot continue any longer and the government wants their tax-deferred money back 🙂
Long answers to short questions but as always “it depends”!
Here are 2 very useful calculators:
I’ve got the RRSP/RRIF calculator on my “Helpful Sites” page, it’s great.
I’ve calculated that if you can have an RRSP at age 60, worth $500k, you can basically withdraw $30k per year from it and not run out of money until age 93/94. That’s pretty good. It assumes 6% ROR and 2% inflation. That’s our savings goal for our RRSP. We’ve got about 20 years to save for that.
I meant to add – thanks for sharing as always.
How about this? At age 65, open a RIF and from age 65 to 71 only move $2,000 from your RSP into the RIF each year, and withdraw $2,000 to get the Pension Credit on your income tax? (If necessary keep whatever minimum amount is necessary to keep the RIF account open; say $100 to $200.) Any downside?
Not really much of one that I can see Helen. That’s $2,000 per person I recall, the pension tax credit.
My site traffic could use some Googleability. Feel free to review it, or to interview me.
An interview would be good. I will flip you an email with some ideas. I recall you have a manual now about investing? Maybe we could touch on that.
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.
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.
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.
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.
It is based on the balance of RRIF as of December 31. So the payment for 2014 is based on the December 31st, 2013 balance.
Thanks for confirming that Cory.
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!
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.
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
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.
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 🙂
The minimum withdrawal is predefined so yes, in part, it is based on the value of investments in the RRIF.
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.
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.
Yeah, I suspect many things will change between now and 2060!
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”).
Thanks for the great comment and other reminder: take advantage of the pension income deduction! Free government loans are good and rare 🙂
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.
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!
Good post. There is also OAS tax clawback to consider. To be tax efficient read Daryl Diamond’s book called something like “Retirement Blueprint”
Thanks Dale. Working on an interview with Daryl if he will entertain it.
I liked his book very much, I wrote a few articles related to it:
How are things with your site? Long time no chat.
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.
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!