For years you've been accumulating money into your RRSP in preparation for your retirement and for financial freedom. For all the work and sacrifice you've put into accumulating your assets, this is your opportunity to celebrate and enjoy the life you've created. Whether it's additional travel, enjoying new hobbies, or just simply spending time and money on family, this is your time.
When you reach this point you're faced with some new questions, one of these being when and how to convert your RRSP to a RRIF? Let's look at what factors should be considered when making your decision to convert your RRSP to a RRIF.
A RRIF is like an RRSP in that any growth from investments is tax sheltered. The key difference is, once converted to a RRIF you're forced to begin taking income from the account annually, which ultimately becomes taxed as income. Once converted, contributions into your RRIF are no longer allowed like they were with your RRSP. Canadian tax law requires you to wind down your RRSP, no later than December 31st of the year you turn 71. No one enjoys paying tax, but ultimately you've benefited from the tax deferral on the growth of investments for years and now CRA wants their cut, whether we like it or not.
This is the reason for the minimum withdrawal amount. The minimum amount is the percentage that you're forced to take annually and is based upon your age and the amount of money you have invested (RRIF Minimums). As an example, at age 71 you are required to withdraw 5.28% for the year. How often the money is received is up to you, (monthly, quarterly, annually) as long as you take the required minimum for the year.
What about withdrawing before turning 71? Many fail to realize that you can actually convert your RRSPs to RRIFs before you turn 71. There is no minimum age to make the conversion and depending on the circumstances it can often make a lot of sense to convert your RRSP to a RRIF earlier. A common situation where one might convert to a RRIF early is when an individual is over 65 years old and has no pension income (no company pension).
When you draw income from an RRSP, it is NOT considered pensionable income, and because of this you miss out on the pension income tax credit. This tax credit allows those 65 or older a credit on their first $2000 of pension income. Depending on your marginal tax rate, $2000 of pension income can be received tax free or is taxed at a lower rate.
Also be aware that you can split RRIF payments between you and your spouse, allowing each of you to utilize the pension income credit described above. There are times where drawing from your RRIF earlier and delaying your government benefits and pensions can make a lot of sense. Both CPP and OAS can be delayed until age 70, and if delayed the amount you receive ends up increasing for each month they are delayed. Waiting will mean you end up having to draw a much larger amount from your RRIF in your 70s, which can ultimately affect your OAS. As many may know, OAS has a point where it begins to be clawed back if your annual income is beyond a certain threshold.* Converting an RRSP to a RRIF earlier can help you to avoid OAS claw back, and at the same time increase the money you receive from the government.
If you're one of those individuals that worked right up till age 71, don't forget to take advantage of the last bit of RRSP room that you've created for your last year of work. Pay less tax by reducing withdrawals If you're not one who requires the annual minimum withdrawals and want to continue to defer tax, you're able to do this by electing to use your younger spouses age for the calculation of minimum withdrawals. Because your spouse is younger, the minimum withdrawal percentage required is lower, which leads to less tax because of lower payments. If your spouse was 60, the percentage required to be withdrawn drops all the way down to 3.33%. It's important to remember that this decision must be made when you're initially converting and that it is irrevocable, even in the event of a divorce or death of a spouse.
I often hear prospective clients complain about the minimum they are being forced to take and that they don't need the full amount. When I ask if they have any TFSA contribution room, too many times the answer is 'yes'. If you have TFSA room and you are being forced to take an income that you don't need, it's a no brainer to throw the surplus into your TFSA. All earnings and growth are tax free and there will be no tax when you take it out.
As mentioned earlier, all RRIF growth is tax deferred and you only pay tax on the income withdrawn from the account. There is no withholding tax on RRIF minimums, however I often recommend clients withhold approximately 20-30% themselves. I find clients get themselves into less trouble by withholding more than not withholding enough. If you withdraw more income than the required minimum, there will be withholding tax at the source on the amount in excess of your minimums.
In closing, when and how much you should be taking from your RRIF will vary depending on your own individual circumstances. It's important that you get ahead with the decision to avoid scrambling last minute and making a mistake. As always you should seek professional guidance from your investment advisor to ensure everything is handled properly and that the amounts being work under your retirement plan. Once you take care of the RRIF conversion, time to sit back, spend some time doing the things that make you happy, and spend some money – you deserve it.
- Brandt Butt, Investment Advisor
Brandt Butt is an Investment Advisor at award winning firm Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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