How to convert a RRSP to a RRIF
Last time we talked about the basics of what a RRIF account was and how it works.
RRIFs are withdrawal plans where you must withdraw a certain amount per year.
Withdrawals from a RRIF (just like regular employment income) are taxable.
There's a bit of a caveat though regarding minimum RRIF payments. The minimum payment is the least amount that you must withdraw from your RRIF in any given year. You can take out more, but you can't take out less.
If you choose to withdraw the minimum RRIF payment, no tax is withheld.
Now don't get too excited – it’s not tax free. Just because no tax was withheld at source - it doesn't mean there is no tax owing.
If no tax is being withheld at source then you will still have to pay income taxes on your RRIF withdrawals when you file. Some RRIF owners prefer to have tax taken off each RRIF payment. They do this so they don't get a big tax surprise at income tax time.
This is similar to your employer deducting tax from your paycheck. Your employer conveniently withholds taxes off each paycheck so you don't have to pay the entire year's tax bill when you file your tax return in April. You can do the same for RRIFs.
Although you can convert your RRSPs to a RRIF at any age, you must convert all of your RRSPs to RRIFs no later than the end of the year you turn age 71.
The important thing to know is that the securities that may reside in your RRSP, i.e. GICs, bonds, mutual funds, etc are left untouched. It is the RRSP plan (the container that is holding your various investments) that is converted to a RRIF. There are no tax consequences in converting a RRSP to a RRIF. One second it's a RRSP, the next it is a RRIF. Everything stays intact.
What do I need to do to convert?
This is where an adviser earns their pay. The adviser carefully explains how RRIFs work and tell you (in advance) what to expect. He makes arrangements to file all the necessary documentation and does all the necessary legwork to consolidate and convert your RRSPs to a RRIF. The role of the client is to sign (where marked).
Converting to a RRIF is also the perfect opportunity to re-evaluate your investment objectives, risk tolerance and suitability. Both you and your adviser may have to make changes in the types of investments that will be part of your new RRIF.
For RRIF investors that invest only in GICs, a change of strategy may be required. Attempts to anticipate what interest rates might be a few years from now have to be put aside. Guessing wrong could easily deplete your new RRIF account at a much faster rate than you would like. Building a RRIF account with short term GICs is generally not a good idea. At current interest rates, if you are age 60 or older you will be withdrawing principle and interest from your account just to meet the minimum RRIF payment that must be paid out to you. Once it’s gone it can’t be replaced. For GIC RRIF accounts I recommend you use the longest terms at the highest rates you can find. Interest rates at some local banks are less than 1.0% for some GICs! The use of a deposit broker in order to find a bank that pays a much higher interest rate can be of great benefit.
If your great aunt Edna unexpectedly left you a million dollars in her Will, you may find yourself in a higher tax bracket.
If your goal is to reduce the amount of your RRIF payments (in order to save tax), then you can request that the RRIF payments be based on a younger spouse's age rather than on your age. The RRIF calculation uses an age factor so using the younger age lowers the RRIF payments. This strategy could net you some tax savings or possibly reduce government clawbacks if your annual income is too high.
Or better yet, if you started a RRIF at an earlier age than 71, you can convert your RRIF back into a RRSP where all RRSP income stays sheltered from tax. Since you no longer have a RRIF, you don't have to worry about paying tax on RRIF income. You still have to convert back to a RRIF by the end of the year you turn age 71.
If however, you need the RRIF income to pay the bills, you'll want to take out the normal RRIF payment or perhaps a higher RRIF payment.
Any other ideas about reducing tax on RRIF income?
If you don't need or want the RRIF income because you are receiving a government or company pension or have sufficient savings, there is no law that says you have to spend the RRIF cheque that you are forced to receive. If you don't need the extra RRIF income, you can always invest it into the new TFSA (Tax-Free Savings Account) and shelter it there.
What if you don't have a pension?
RRIF income is treated like pension income so it would be prudent to take advantage of the $2,000 pension deduction by having your RRIF generate at least this amount.
Due to the myriad of government rules, RRIFs may not be the easiest thing to understand. Have a RRIF question? Need help converting a RRSP to RRIF?
Drop me a line at firstname.lastname@example.org