August 24, 2018

Converting an RRSP into a RRIF

An older gentleman and a younger woman sit outside at a table, looking at a laptop. An older gentleman and a younger woman sit outside at a table, looking at a laptop.

If you are like many Canadians, retirement represents a significant milestone: a transition to spending more time however you want. Of course, retirement can also mean facing a complex set of choices about your money. The biggest one is often, how do you make your savings last?

If you are retired, or are nearing retirement, there is an investment vehicle that should be on your radar: the Registered Retirement Income Fund (RRIF).

So, how does a RRIF work?

At essence, it’s a Registered Retirement Savings Plan (RRSP) in reverse. Whereas an RRSP helps you save for retirement through annual contributions, a RRIF does the opposite, requiring you to make annual withdrawals from your savings to help fund your retirement. A RRIF offers you several choices when it comes to how to invest your money. You can hold various investments – such as mutual funds, segregated funds, Guaranteed Interest Options (GIO), Exchange Traded Funds (ETF), etc.

If there is money left in your RRIF when you die, it goes to the beneficiaries you’ve named in the application process for the RRIF as part of your broader estate planning. In bankruptcy situations, you receive the same creditor protection for funds in a RRIF as you would in an RRSP.

A RRIF’s flexibility brings certain responsibilities. The more income you take out in the short term, the less money you’ll have left in the long term.

Are withdrawals from my RRIF taxable?

Yes. Remember all those years you were making RRSP contributions and reducing the income tax you paid? Well, you were deferring those taxes, not avoiding them completely.

The good news is that you won’t pay any taxes when you convert your RRSP into a RRIF, because you’re not immediately withdrawing the money. The funds you take out of your RRIF each year, however, are taxable in the year you receive them.

Here are some simple rules to remember about RRIFs and taxes:

  • You don’t pay tax on money in your RRIF, as long as it stays there. This includes any growth on your investments inside the RRIF.
  • You only pay tax on the money you withdraw from your RRIF each year, which is treated as income.
  • And if you take out more than your minimum amount, taxes will be withheld at the time of withdrawal because financial institutions are obligated to collect tax immediately.

At what age do I have to convert the RRSP to a RRIF?

You can choose to withdraw your RRSP as a lump sum, or convert it into a retirement income product such as a RRIF by the end of the year in which you turn 71.

RRSPs are designed to help you save money for retirement through the incentive of deferred taxes. You contribute money to your RRSP while you are working and earning an income. During retirement you will (in theory) have a lower total income. This means you are in a lower tax bracket and the money you are withdrawing from your RRIF is taxed at a lower rate.

You must begin taking a RRIF income by the end of the calendar year in which you turn 72. For example, if you turned 72 in 2018, you have until Dec. 31 of 2018 to start receiving that money.

How much do I have to withdraw from my RRIF each year?

The minimum amount you must draw down from a RRIF each year is based on a percentage of the balance of the total investment at the beginning of the year. These percentages increase as you age. There is flexibility here too, as you can choose how often you take money from the account: monthly, quarterly, semi-annually or annually.

In 2015, a new set of minimum withdrawals that you are required to make from your RRIF was established; there is no maximum withdrawal. The percentage starts at just over 5% when you turn 71 and tops out at 20% for those aged 95 and over. If your partner is younger than you, you can use his or her age to calculate the minimum amount you must withdraw each year.

Can I convert a RRIF back to an RRSP?

In short, yes, but it depends how old you are. Once you create a RRIF, you can no longer contribute money to it, and the plan can’t be cancelled until you die. If you wanted to, however, you could convert a RRIF back into an RRSP if you are under the age of 71.
An important thing to remember is that you are permitted to open multiple RRIFs – this means you can slowly transition funds into one RRIF while still contributing to an RRSP, until the age of 71. At that point, you can open another RRIF and transfer the rest of your money from the RRSP.

Your financial advisor is an excellent source of information about your different options for creating income in retirement. He or she can guide you with advice on the most suitable choices for your own financial situation.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.

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