When I worked in banking, on December 31 we usually closed the branch at 3 pm so us bankers could get a head start on our New Year’s Eve partying. One year, at about 2:55 pm, a fellow sat down in my office and told me he needed to convert his RRSP to a RRIF. He had turned 71 that year and today was the deadline. As my stomach sank down to my knees, he then also informed me that he wanted his funds transferred to a new RRIF Direct Trading account.
At the best of times it took at least several days to open the on-line brokerage account, not to mention the time it took to determine what he had (he was not a customer of my branch), and fill out the new application and transfer forms.
So, while my fellow employees were happily leaving work and turning off the lights behind them, I was frantically trying to complete the necessary documents with the assistance of a really helpful brokerage agent who was probably also watching the clock.
So, on behalf of all financial institution employees, if you turned 71 this year, please, please, do not wait until the last moment to open your RRIF – give it plenty of time.
What you need to know to convert your RRSP to a RRIF
The transfer process
There is no need to change your existing RRSP investments. They can be transferred “in kind” to your new RRIF. If you are staying with the same financial institution you’ll be just replacing the investment holding “bucket.” However, if you are planning to switch to another financial institution, or even a different arm of the same institution (e.g. branch to on-line brokerage), there are some assets that can’t be transferred as is:
- Unmatured GICs
- Proprietary mutual funds such as those from Manulife or Investors Group
Even though your investments can just switch over, that isn’t all. The RRIF is a new plan. When you complete the application, there are several decisions you have to make.
Don’t assume that your RRSP beneficiary automatically becomes the RRIF beneficiary. You must name a beneficiary on the new application. You don’t have to use the same one – just be aware of the different consequences:
- Spouse as beneficiary. The balance of the RRIF account is transferred tax-free to your spouse who can deposit it into their own RRSP or RRIF.
- Spouse as successor beneficiary. The RRIF is transferred tax free to thespouse and they continue to receive the original payment arrangement without interruption.
- Qualified beneficiary. Dependant children or grandchildren under the age of 18, or a disabled child of any age, receive the proceeds tax free if transferred to an annuity or their own RRSP or RDSP.
- Another beneficiary. Naming a beneficiary bypasses probate and the entire RRIF balance is passed on to him/her/them. The estate pays the taxes. (However, if there are not enough funds in the remaining estate to cover taxes, you know who the tax man will be looking at for payment.)
- The RRIF becomes part of the estate and is distributed as per the terms of the will.
- Decide on a withdrawal schedule
The first withdrawal must be made the year following your 71st birthday. There is a minimum payment schedule set by federal regulations and based on a percentage of your account on January 1st each year. It may make sense to use a younger spouse’s age for the minimum amount calculation. This decision must be made before the first withdrawal and it can’t be revoked afterward.
Depending on your cash flow requirements, you may receive your payments monthly, quarterly, semi-annually or annually. There is no tax withheld for minimum payments, but if you choose to withdraw a greater amount, tax will be withheld on the additional sum by the financial institution.
And, of course, all withdrawals are considered income for tax purposes. The first $2,000 is eligible for the Pension Tax Credit (age 65 and older).
Should you consolidate all your RRSP accounts?
Many investors have RRSP funds scattered around different financial institutions – especially GICs. There may have been promotional interest rates offered, or there was concern about staying under the CDIC maximum amount (now $100,000, but earlier was $60,000.)
You may want to leave your GICs in place when you convert them to RRIFs. You can arrange your payment schedule to help with your cash flow. For example: Say you have four GICs at various financial institutions. You could choose an annual payment from each, but stagger them so you get a payment from one in March, the next in June, then September, and December (or whatever works for you).
If you hold securities, however, your RRIF will be easier to manage if you consolidate your funds. Ask the receiving institution if they will compensate you for any transfer fees.
Also, be aware that if you own a LIRA, you may transfer up to 50% of the balance into a RRIF when you convert to it a LIF.
You have until December 31 of the year you turn 71 to convert your RRSP to a RRIF.
Some financial institutions will do the conversion automatically. However, in most cases the RRSP will be deregistered and the entire value will become taxable income.
Acting just short of the deadline is rarely a good idea. You want to have time to properly assess your circumstances so you can make sensible decisions.
Be smart and start planning what you want well ahead of time.