What You Need to Know About Converting Your RRSP to a RRIF
You’ve worked hard to build your RRSP – and received nice tax deductions for your efforts. If you have celebrated your 71st birthday this year (or soon will be), it’s time to pay the piper. By legislation, your RRSP (Registered Retirement Savings Plan must be de-registered. The most popular option is to convert it to a RRIF (Registered Retirement Income Fund).
What is a RRIF?
A RRIF is established by transferring RRSP assets. It is used to systematically draw income and allow you to begin enjoying the benefits of your savings while still continuing tax-deferred growth.
Once your RRSP is converted to a RRIF you can no longer make contributions and are required to make minimum annual withdrawals as set out by federal regulations.
Payments must begin the calendar year following your 71st birthday.
How much can you withdraw?
You can withdraw as much as you want as long as you meet the minimum required amount for the year. Review all your sources of retirement income and assess how your RRIF payments will factor into your cash flow needs.
You can take out a lump sum at the end of each year to increase your tax-deferred growth. Or, depending on your needs, you can take monthly, quarterly or semi-annual payments.
There’s nothing stopping you from taking more than the minimum. However, if you do, any additional amount will be subject to withholding tax at the source.
And, of course, all withdrawals are considered income for tax purposes. The first $2,000 is eligible for the Pension Tax Credit and income splitting with your spouse (age 65 and older).
How is the minimum amount calculated?
This amount is calculated as a percentage of the RRIF value as well as your age on January 1 of each year.
As you can see by this chart, the percentage increases as you get older.
The mandatory minimum withdrawal does not incur any withholding tax at the time it is withdrawn, which allows you to benefit from the entire amount until tax time.
To reduce the withdrawal amount, you can use your younger spouse’s age as the base for the minimum amount calculation. You must select this option when filling out the original RRIF application. Once you make this selection, you can’t change it.
What investments can you hold in a RRIF?
RRIFs allow you to control how your money is invested. They offer the same investment options as your RRSP.
Most investments can be transferred directly “in kind,” or you can choose to change your portfolio to better suit your needs. If you are planning to switch to another financial institution, or even a different arm of the same institution (e.g. branch to on-line brokerage), you can’t transfer unmatured GICs or proprietary mutual funds such as those from Manulife or Investors Group.
It will make your bookkeeping easier if you consolidate all your RRIF’s into one account if you can. Ask the receiving institution if they will compensate you for any transfer fees.
Allow for some liquidity to make your annual withdrawals (e.g. cash, GICs, short-term bonds, dividends). Equities should be sold by choice, such as taking profits, rather than by necessity because you need to replenish your cash flow.
What happens when you die?
Naming a beneficiary ensures that the RRIF is excluded from the calculation of estate probate fees.
Don’t assume that your RRSP beneficiary automatically becomes the RRIF beneficiary. You must name a beneficiary on the new application, but it doesn’t have to be the same one.
A spouse can transfer the funds tax free to their own RRSP or RRIF. Consider naming your spouse “successor annuitant” of your RRIF. This designation allows your RRIF payments to continue to go to the surviving spouse without interruption.
Dependent children or grandchildren under the age of 18, or a disabled child of any age, receive the proceeds tax free if transferred to an annuity or their own RRSP or RDSP.
If you name another beneficiary, the entire remaining value of the RRIF is passed on to him/her/them and the estate pays the taxes.
If the RRIF becomes part of the estate, it is distributed as per the terms of the will.
The bottom line
You can, of course, convert your RRSP to a RRIF at any time, but it must be done no later than December 31st in the year in which you turn 71.
Be kind to the staff at your financial institution by not waiting until the last minute. Some financial institutions will do the conversion automatically, but don’t rely on that.
Be smart and start planning what you want well ahead of time.