Converting your RRSP to a RRIF: Everything you need to know
In this article, we walk you through when, why, and how to convert your RRSP to a RRIF, and most importantly, how to optimize the transfer for tax purposes.
By Fonds de solidarité FTQ
Transferring money from a registered retirement savings plan (RRSP) to a registered retirement income fund (RRIF) marks the start of a new chapter in your retirement savings—now you can pay yourself an income and enjoy your savings! Like any registered savings vehicle, the RRIF has its own unique features and benefits. Here's everything you need to know to optimize the way you use your RRIF.
When to convert your RRSP to a RRIF?
If you want to pay yourself an income, no matter what age, you can decide to convert your RRSP to a RRIF. However, by December 31 of the year you turn 71, you can no longer hold an RRSP and must withdraw or transfer your retirement savings. It's the law!
Why convert your RRSP to a RRIF?
The RRIF is the logical extension of your RRSP. You've spent a good portion of your life contributing to your RRSP for retirement, and now it's time to make the most of your savings. The role of the RRIF is to allow you to draw retirement income from the money accumulated in your RRSP, while you continue to invest and grow your money. Since the RRIF is a savings vehicle, you can use it to invest in the products of your choice, such as mutual funds, and enjoy potential returns.
How to calculate how much you should withdraw each year?
A unique feature of the RRIF is that you must withdraw a minimum percentage of the total value of your savings each year. This percentage is calculated according to your age and increases each year. However, the more you withdraw, the more the market value of your RRIF tends to decrease. As a result, your mandatory minimum withdrawal amounts may decrease as you get older.
The minimum withdrawal percentage ranges from 5.28% (age 71) to 18.79% (age 94). As of your 95th birthday, the percentage is capped at 20% for all subsequent years.
That said, there's nothing stopping you from withdrawing more than the minimum amount. You simply need to plan your withdrawals by considering all of your income sources (such as government benefits), along with your needs and the taxes you'll have to pay. Making a budget can be a great way to monitor your full retirement income. Keeping track of all of the money coming in and going out will make it easier to determine if the minimum withdrawal amount is sufficient for you.
Jacques's case
Jacques has $50,000 in savings in his RRIF with FlexiFonds. Now that he's 72, he knows he needs to withdraw at least 5.40% of his savings this year, which amounts to $2,700 (before taxes).
How does your spouse's age impact your withdrawals?
Since the mandatory minimum amount to be withdrawn each year depends on age, you can request to base the calculation on your spouse's age rather than your own. The younger the person is, the lower the mandatory minimum withdrawal percentage will be. Using the younger spouse's age can be a good idea if you want to reduce the amount you need to withdraw, pay less tax, and keep more money in your RRIF. Starting at age 65, you can also split up to 50% of the amount to be withdrawn with your spouse—a principle known as pension income splitting.
Of course, you'll need consider your spouse's income, your personal income, and your joint tax situation before adopting such a strategy since this decision can't be changed later.
Jacques's case
Jacques is 72 years old, is enjoying a nice standard of living in retirement, and doesn't feel he needs the $2,700 (before taxes) that he's required to withdraw from his RRIF. Since his spouse is only 66 years old, he has decided to use her age to make a minimum withdrawal of 4.17%, instead of 5.40%, which amounts to $2,085 (before taxes).
When are taxes deducted?
You don't have to pay any taxes when you transfer your RRSP to a RRIF because it's a transfer between two savings vehicles and not a withdrawal. In addition, the first mandatory withdrawal doesn't take place until the year following the transfer.
When it comes to taxes, you have two options if you withdraw the minimum annual amount:
- Have your taxes withheld at the source: you pay your share of taxes whenever you make a withdrawal.
- Pay tax only when you file your income tax return at the end of the fiscal year.
If you withdraw more than the minimum amount, a withholding tax rate of 20% to 30% will apply depending on the amount of the withdrawal:
- $5,000 or less = 20%
- $5,001 to $15,000 = 25%
- $15,001 and up = 30%
Note that you can also ask for a higher withholding tax rate to be applied.
Jacques's case
If you add up his government pension, pension fund, and minimum RRIF withdrawal amount, Jacques's total income is $45,000. As such, his tax liability will be based on a marginal tax rate of 26.5%. In anticipation of this expense, he decides to request that a 25% withholding tax rate be deducted from his minimum withdrawal of $2,085, resulting in a net amount of $1,563.75.1
How to determine the frequency of your withdrawals?
Even though you have to withdraw a minimum amount annually, you don't have to do it all at once. In fact, you can choose between withdrawing a lump sum at your convenience, or receiving 12 monthly payments.
Choose the RRIF with FlexiFonds
Comprising one of our three mutual funds, the RRIF with FlexiFonds allows you to reduce the risk related to your investments through its asset allocation. That way, you can pay yourself a retirement income while contributing to the local economy.
You can transfer your RRSP to a RRIF with FlexiFonds directly online.
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