Switching your RRSP to a RRIF is best for those retiring soon

Portrait Of Smiling Senior Couple Saving Money In The Pink PiggybankConverting your RRSP to a RRIF is clearly the best of three alternatives at age 71 and there are four ways to make sure you get the maximum benefit from the RRIF (Registered Retirement Income Fund).

If you have one or more RRSPs (registered retirement savings plans), you’ll have to wind them up at the end of the year in which you turn 71. We think converting your RRSP to a RRIF (registered retirement income fund) is the best option for most investors.

You have three main retirement investing options:

• You can cash in your RRSP and withdraw the funds in a lump sum. In most cases, this is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income.

• You can purchase an annuity.

• Proceed with the RRSP to RRIF conversion

RRIFs are the best retirement investing option for most investors

Converting your RRSP to RRIF is the best retirement investing option for most investors. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal.

Like an RRSP, a RRIF can hold a range of investments. One convenient thing to note about the RRSP-to-RRIF conversion process is you don’t need to sell your RRSP holdings when you convert — you simply transfer them to your RRIF.

When you hold a RRIF, you must withdraw a minimum each year and report that amount for tax purposes. (You may withdraw amounts above the minimum at any time.) Revenue Canada sets your minimum withdrawal for each year according to a schedule that now starts at 5.28% of the RRIF’s year-end value at age 71, reaches 6.82% at age 80, and levels off at 20% at age 95 and beyond.

Four tactics to get the most from the Conversion

Here are four retirement investing tactics for making the most of your tax savings when undergoing the RRSP to RRIF conversion process:

1.) Use a younger spouse’s age to set a lower minimum withdrawal: For example, if your spouse is 65 when you turn 71, then the minimum withdrawal set by Revenue Canada is 4.00%, rather than 5.28%. The rate increases yearly until it reaches 5.28% when your spouse turns 71. It then follows the normal schedule, reaching 6.82% when your spouse reaches 80, and levelling off at 20% at age 95.

2.) Stick with late-in-the-year payments: You start making withdrawals from your RRIF in the year following the year in which the RRIF is established. For example, if you open a RRIF in 2016, you have to make your first withdrawal by December 31, 2017.
You can receive RRIF payments on any schedule, though most investors choose to receive them either monthly or yearly. Unless you need monthly payments to live on, it’s best to request only one payment per year, near year-end, to prolong your tax deferral. For practical purposes, however, set a date such as December 15 to allow for delays. Just contact the broker or institution that holds your RRIF to set up your yearly payment. If you are a portfolio management client of Successful Investor Wealth Management, we can arrange this for you.

3.) Withdraw shares instead of cash: Keep in mind that you don’t need to make your minimum withdrawal in cash. Instead, you may make an “in-kind” withdrawal of shares instead of cash.

4.) Name a RRIF beneficiary: Assets in a RRIF automatically pass on to your beneficiaries in the event of your death. If you name your spouse or a financially dependent child under 18 as beneficiary, assets are passed on tax-free to their RRIF or RRSP.
Account for withholding tax when withdrawing more than the minimum requirement
Note that when you make a RRIF withdrawal above the minimum requirement, Revenue Canada requires your financial institution to withhold tax at the time of withdrawal. Tax is withheld at the rate of 10% for amounts up to $5,000, 20% up to $15,000 and 30% on $15,001 and up.

The tax on your RRIF withdrawal may be more or less than the amount withheld. You’ll have to report the full withdrawal as income and pay tax at ordinary rates. But you’ll get a credit against taxes owing if too much tax is withheld.

For investors turning 71 the RRSP to RRIF conversion process makes the most sense for investors that would like to live off their retirement income.

Do you invest differently inside your RRSP than outside? Did you find the RRSP to RRIF conversion process smooth? How well have you done in your RRSP/RRIF investing compared to your results in non-registered investments?

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books.

5 thoughts on “Switching your RRSP to a RRIF is best for those retiring soon

  1. Good tip about withdrawing shares rather than cash.

    The minimum withdrawal percentages mentioned are outdated and incorrect – e.g. as of the 2015 budget the minimum at age 71 is 5.28 percent (google “RRIF minimum withdrawal”) – surprised that Pat Mckeough was not aware of this.

  2. Hi;
    Just wondering…..if a person wants or needs to access their RRSP before 71; should they convert it to a RRIF? In other words, I guess – is it always advantageous to convert RRSP to RRIF when one wants to access the money; or, is there some other advantage to waiting until turn 71?


    1. No need: occasional one-time RRSP withdrawals are more flexible. Note that your financial institution will automatically deduct tax of 10, 20 or 30% on the RRSP withdrawal, depending on how much you take out.

    2. Jon & Frugal Guy,

      if you are over 65 and do not have pension income (eg. all those formerly self-employed people) you definitely want to set up a RRIF (fund it from the RRSP) to generate an income of $2,000 because that amount is considered tax free pension income.
      Note: if you just extract the $2000 from your RRSP it becomes ordinary income not pension income.
      A bit of hassle but every little bit helps :)

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