If you are nearing retirement age, you are probably wondering how to transfer the savings in your Registered Retirement Savings Plan (RRSP) to your wallet.
After spending all that time saving from your hard-earned income for years in a tax-deferred RRSP, it is almost time to use your retirement nest egg.
You have the option of withdrawing the entire fund as a lump sum. However, it would be better to convert the account to a Registered Retirement Income Fund (RRIF) instead.
RRIFs allow you to withdraw amounts from your nest egg over time as income. Many Canadian retirees prefer RRIF as their ideal retirement vehicle, as it helps to defer taxes throughout retirement.
I will discuss everything about all the RRIF rules you need to know about converting your RRSP.
How to Convert an RRSP to RRIF – 4 Steps
I will briefly outline the steps you can follow to convert your RRSP to an RRIF.
Step 1: Choosing the Investment Institution
The first thing you need to do is decide where you will keep your RRIF. Most people use the same bank or financial institution that stores their RRSP. The option can be ideal if you want to keep the same investments in your RRIF as you had in your RRSP.
However, if you have multiple RRSPs, I would recommend consolidating them to a single RRIF to make everything more manageable.
If you have an RRSP with a financial institution, you can expect them to either let you know that you should open an RRIF or start the conversion automatically.
Step 2: Completing RRIF Application
Whether you decide to convert your RRSP to an RRIF yourself or if the financial institution begins the process automatically, you will need to fill out an application.
The RRIF is an entirely new plan. Even if you had an RRSP with the financial institution, it would require you to fill out the application on which you will have to make several decisions regarding the retirement income fund. Many financial institutions prepare the application on your behalf to make the process easier.
Step 3: Choosing RRIF Beneficiary
You never know what life has in store for you and how long you will live. Many people build their nest eggs intending to use what they need while they are alive and leave the rest behind for their loved ones.
The RRIF requires assigning a beneficiary. Your spouse, children, or grandchildren can qualify to receive the RRIF tax-free once you pass away. You can name other beneficiaries for the RRIF balance when you pass, but the account will require paying taxes. You can also make the RRIF a part of your estate and distribute the sum based on your last will and testament.
Under the current rules, naming your spouse as the beneficiary can transfer the balance to them without triggering taxes. If your surviving spouse is over 71 years old, the RRIF balance must be transferred to an RRIF.
Step 4: Deciding a Withdrawal Schedule
You have to begin withdrawing money from your RRIF the year after you turn 71 years old. All the withdrawals you make from your RRIF will count as taxable income. However, you will likely enjoy a lower tax rate for the income compared to when you made the money.
According to RRIF rules, you have to withdraw a minimum amount from your RRIF each year. The minimum amount is based on a percentage of the account balance at the start of each year. This percentage will increase as your age increases.
When to Convert Your RRSP to RRIF
You can keep contributing to your RRSP until you turn 71. Even if you do not require any periodic income, every retiree must convert their RRSP into income by the end of the year (Dec 31) that they turn 71. The RRIF presents you with an excellent conversion for your RRSP.
The RRIF is also a tax-deferred account like your RRSP. It means that as long as you hold your funds in the RRIF, it cannot be taxed by the Canada Revenue Agency (CRA). It means that any assets you have stored in the converted RRIF can continue to grow.
Remember that if you do not convert your RRSP to RRIF, it will automatically be considered a lump sum withdrawal that counts as taxable income. Your tax bill on the entire nest egg can be massive.
It is better to convert your RRSP to an RRIF directly before the CRA de-registers your RRSP at the end of the year (Dec 31) of your 71st birthday.
The RRIF provides you with a high level of control over the investments in your retirement plan. It also gives you plenty of flexibility in how you can receive an income during your retirement. You can customize the plan based on how you plan to live during retirement.
Deciding Your Retirement Income
The first thing you should consider when you are deciding to convert the RRSP to RRIF is how much income you might need. This decision can make a substantial difference in how long your nest egg lasts. If you spend too much money quickly, you can even run out of it.
The government has placed mandated minimum annual withdrawals for RRIFs. It means that you have to withdraw at least some money from your RRIF each year. However, you can tailor your income based on how much you will need within the requirements.
You can customize it to monthly, quarterly, or annual payments. You can also take out larger lump sum amounts if you need to travel, make major purchases, or for any other purpose.
RRIF Withdrawal Rules
Converting an RRSP to RRIF means you will be subject to the minimum income rules. However, you do not need to begin the income until you turn 72 years old. At 71 years, your income is essentially $0 because the RRIF has no value at 70 years old.
The government established minimum withdrawals in 1992 for the RRIFs. Before you turn 71 years old, the minimum percentage of your payout is worked out using the following formula: 1 ÷ (90 – Your Age Right Now). The government changed RRIF minimum amounts again in 2015.
Below is the table representing the schedule for minimum withdrawals based on the rules since before 1992, between 1992 and 2015, and from 2015:
| Age | Pre 1992 | 1992 to 2015 | 2015 and later |
| 65 | 4.00% | 4.00% | 4.00% |
| 66 | 4.17% | 4.17% | 4.17% |
| 67 | 4.35% | 4.35% | 4.35% |
| 68 | 4.55% | 4.55% | 4.55% |
| 69 | 4.76% | 4.76% | 4.76% |
| 70 | 5.00% | 5.00% | 5.00% |
| 71 | 5.26% | 7.38% | 5.28% |
| 72 | 5.56% | 7.48% | 5.40% |
| 73 | 5.88% | 7.59% | 5.53% |
| 74 | 6.25% | 7.71% | 5.67% |
| 75 | 6.67% | 7.85% | 5.82% |
| 76 | 7.14% | 7.99% | 5.98% |
| 77 | 7.69% | 8.15% | 6.17% |
| 78 | 8.33% | 8.33% | 6.36% |
| 79 | 8.53% | 8.53% | 6.58% |
| 80 | 8.75% | 8.75% | 6.82% |
| 81 | 8.99% | 8.99% | 7.08% |
| 82 | 9.27% | 9.27% | 7.38% |
| 83 | 9.58% | 9.58% | 7.71% |
| 84 | 9.93% | 9.93% | 8.08% |
| 85 | 10.33% | 10.33% | 8.51% |
| 86 | 10.79% | 10.79% | 8.99% |
| 87 | 11.33% | 11.33% | 9.55% |
| 88 | 11.96% | 11.96% | 10.21% |
| 89 | 12.71% | 12.71% | 10.99% |
| 90 | 13.62% | 13.62% | 11.92% |
| 91 | 14.73% | 14.73% | 13.06% |
| 92 | 16.12% | 16.12% | 14.49% |
| 93 | 17.92% | 17.92% | 16.34% |
| 94 | 20.00% | 20.00% | 18.79% |
| 95+ | 20.00% | 20.00% | 20.00% |
You should take out as little as possible to enjoy the maximum tax deferral possible with your RRIF. You might want to consider a low withdrawal amount if you do not want to pay high-income taxes and you do not need the income.
There are several ways you can stretch out the income. One of the best ways to stretch the income is to base the minimum income amount on your spouse’s age, provided your spouse is younger than you are.
If you decide to withdraw based on your spouse’s age, you need to make the decision before you make the first withdrawal from your RRIF.
For Example: Let’s consider Justin Anderson. Justin is a Canadian aged 71, and he has an RRIF that holds $200,000. Based on the schedule and the minimum withdrawal rules, he should withdraw at least 1 ÷ (90-71) = 5.26%. Based on his $200,000 RRIF balance, he has to withdraw at least $10,520 each year.
However, Justin’s wife Christine, is 65 years old. If they base the minimum withdrawal from her age, it will amount to 1 ÷ (90-65) = 4%. That translates to $8,000 each year. Deciding to withdraw the RRIF based on Christine’s age, Justin could significantly reduce the minimum withdrawal limit and save plenty on the income tax bill.
RRIFs Provide You with Flexibility
The best thing about the RRIF is that you get an incredible amount of flexibility for your retirement income through it. You can choose your investments, how much income you want, and the frequency with which you receive the payments.
You also have the flexibility to change the income and other factors regarding your RRIF if your situation changes. The RRIF is a fantastic planning tool because you can customize it to your specific needs and circumstances.
There are a few common types of RRIFs that you can set up for your income during retirement:
Minimum Income RRIF
This RRIF provides you with the lowest possible RRIF income. People traditionally go for this if they do not need the money and want to maximize the tax deferral for their nest egg for as long as they can.
If this is you and your spouse is younger than you are, you can use their age to minimize the RRIF income.
Remember that the RRIF minimum income is based on the value of your RRIF on December 31 of the previous year. It means income planning can sometimes be challenging because you do not know what your income will be until December 31 each year.
Capital Preservation RRIF
This RRIF prioritizes providing you with a fixed level of income and preserving your capital. If you choose the capital preservation RRIF, you will withdraw returns from your investments each year (subject to minimums).
It can give you a reasonably predictable income, especially if you are using mutual funds as your RRIF investments.
Level Income RRIF
If you want to provide income for a specific period (let’s suppose the age of 85), this RRIF can be an ideal choice for you.
In this case, you will determine the fixed income you can withdraw from your RRIF so that the entire assets will deplete by the time you turn 85 years old. You can use either your age or a timeframe to set the level income RRIF.
How Many RRIFs Can You Have?
You have the option of setting up several RRIFs. There is no limit to how many RRIFs you can have. You can use multiple RRIFs for various purposes.
For instance, you can set one up that pays a level of income for the next five years until government benefits can step in to boost your retirement income. You can have a capital preservation RRIF that provides you with a more stable long-term income.
Ideally, I would recommend consolidating your RRIFs into a single fund. It can significantly reduce the hassle of managing multiple investments, and there will only be one minimum withdrawal that you have to deal with.
Several RRIFs will require a lot of time and energy to manage. It also carries the burden of making minimum withdrawals for each RRIF.
Can You Contribute to Your RRIF?
The RRIF is also a tax-deferred account like your RRSP. Investments inside the account can grow without incurring income taxes, and you are only taxed for your withdrawals. However, it does not mean you can contribute directly to your RRSP.
If you want to make any investments for your RRIF, you have to contribute to your RRSP before converting it to an RRIF. You can only contribute to a spousal RRSP if you are over 71 years old on the condition that your spouse is younger than 71.
Be Wary of Attribution Rules
If you are setting up an RRIF with spousal RRSP money, you need to be aware of the RRIF rules for attribution. Suppose there has been any contribution to the spousal RRSP through any institution within the year of income or the last two years.
In that case, the original contributor will be attributed to the income. The attribution only applies to amounts that exceed the minimum income. If you need income, but you do not want attribution, you can stick to withdrawing the minimum.
Withholding Taxes on RRIF
The RRIF income is also subject to government withholding tax rates. Consider it the same as your employer withholding taxes and remitting them directly to the government. Similarly, your RRIF administrator has to withhold taxes and remit them to the government.
If you have a minimum withdrawal RRIF, it will not be subject to withholding tax. However, you can request any level of withholding tax. Here’s what the withholding tax rates look like in any other circumstances:
- 10% withholding tax rate on withdrawals lower than $5,000.
- 20% withholding tax rate on withdrawals between $5,001 and $15,000.
- 30% withholding tax rate on withdrawals over $15,000.
Conclusion
As you can see, you have to deal with several issues when you are planning your RRIF income. It is crucial that you take all the possible measures to protect your nest egg.
I would strongly recommend sitting and discussing everything with a financial advisor early on so you can maximize your RRIF benefits throughout your retirement.
You have plenty of options to consider. Planning early can help you make the most suitable decisions. Learn more about how to do retirement planning sources here.
I would like to see a similar article regarding the second option, converting my RRSP to an annuity.