Merry Christmas! And here’s a little present for everyone sliding into the third base of life.
A Registered Retirement Savings Plan (RRSP) must be converted to a Registered Retirement Income Fund (RRIF) by the end of the year an account holder turns 71. Mandatory minimum withdrawals must begin the following year and every year thereafter. The withdrawal is based on the previous year’s ending account balance and the withdrawal percentage depends on the account holder’s age. It’s approximately 5% for 72-year-olds, gradually increasing every year.
There is a common misconception RRSP account holders should wait as long as possible to convert to a RRIF, deferring taxes for as long as possible. This may make sense for some, but all RRSP account holders should develop a drawdown strategy long before they are required to convert to a RRIF. For example, those that will have defined benefit pensions should consider converting some or all their RRSP to a RRIF before they begin collecting their pensions and draw down some of their RRIFs while they’re in a lower tax bracket. An early RRIF drawdown strategy could also help avoid triggering Old Age Security (OAS) clawbacks which in 2024 will take effect if income exceeds $90,997.
Frequently asked questions:
1. Is there a minimum age an RRSP holder must be to open a RRIF?
You can open a RRIF at any age and transfer some or all the assets from your RRSP to your RRIF. This can make sense for those that require withdrawals from their RRSP prior to the age of 71. The advantages of withdrawing from a RRIF for cash flow needs rather than an RRSP is there is no withholding tax on minimum withdrawals from RRIFs and most financial institutions do not charge a deregistration fee every time you process a withdrawal.
2. Can I hold all the same investments in my RRIF as I hold in my RRSP?
Yes, you can hold the exact same investments in your RRIF as you do your RRSP so you can continue to hold assets such as ETFs, mutual funds, stocks, bonds, GICs and high interest savings ETFs.
3. What asset allocation do you recommend for RRIFs as well as for the mandatory annual minimum withdrawal amount?
Everyone’s circumstances are different so the asset allocation I recommend for RRIFs depends on one’s overall portfolio and cash flow requirements. A good starting point is to have a balanced 60-40 allocation of diversified equity and fixed income ETFs and gradually increase the fixed income allocation over time. For the mandatory annual withdrawal amount – if you plan on withdrawing monthly or at the end of the year as a lump sum, I recommend parking the funds in a high interest savings ETF or cash equivalent so there is minimal risk, and the funds can still earn some interest.
4. Is there a maximum amount that I can withdraw from my RRIF in any given year?
No, there is no annual maximum amount that you can withdraw from your RRIF but withdrawals from RRIFs are included in your taxable income for the year and subject to tax at your marginal rate so its important to be mindful of how much you withdraw.
5. I am 72 years old and my RRSP was converted to a RRIF last year, but I still have available RRSP contribution room. Is there anything I can do to utilize it?
Even though you can no longer make contributions to an RRSP in your name after the age of 71 you can still contribute to a spousal RRSP so long as your spouse or common law partner is 71 or younger at year-end.
6. If I don’t require any withdrawals from my RRIF is there anything I can do to reduce the required withdrawal amount?
If your spouse or common law partner is younger than you then you can choose to have the annual minimum withdrawals based on your partners age which would reduce the amount you are required to withdraw each year.
7. Do withdrawals from RRIFs count as pension income?
After the age of 65, withdrawals from RRIFs are considered pension income which can be split between spouses so total taxes can be potentially lower. Also, depending on the province or territory you live in you may be entitled to claim the pension income tax credit on the first $2,000 withdrawn from a RRIF after the age of 65.
8. Am I able to name a beneficiary to my RRIF?
Yes, just like with RRSPs you can name a beneficiary to your RRIF. If you name your spouse as the beneficiary, upon death your RRIF can be transferred tax-deferred to your spouse’s RRSP or RRIF so your RRIF would not make up part of your estate and therefore avoid probate fees.
The optimal time to convert an RRSP to a RRIF differs for everyone so it’s important to continually assess your overall situation every year. Converting even a small part of your RRSP to a RRIF prior to the age of 71 can make sense to take advantage of potential tax credits after the age of 65, make TFSA contributions and help fund grandkids RESP contributions. With strategic planning you can smooth out your retirement income stream and potentially pay less tax over time.
