Tax-Free RRIF Withdrawals, and In-Kind vs In-Cash Transfers

Today I’m answering reader mail for a feature I call the Money Bag. I’ll answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about all the money things you’re dying to know.

This edition of the money bag answers your questions about tax-free RRIF withdrawals, transferring investment accounts in-kind or in-cash, getting out of a group RESP contract, and how early retirement affects your CPP benefits. 

First up is Bert, who heard about a way to withdraw $2,000 from his RRIF tax-free and wants to know how to do it. Take it away, Bert:

Tax-free RRIF Withdrawals

“Hi Robb, I understand that I can withdraw about $2,000 almost tax free from a RRIF. Does “tax-free” mean no withholding tax, or does it truly mean “no tax”, as in it’s not counted as income?”

Hi Bert, thanks for your email. You’re referring to the pension income tax credit, or pension income amount. It allows those age 65 or older to claim a federal non-refundable tax credit on up to $2,000 of eligible pension income (including RRIF withdrawals).

Note that you’ll have income tax withheld on your RRIF withdrawal, but then at tax time you’ll be able to claim the Pension Income Tax Credit, which eliminates 15 percent in federal tax.

Regardless of your tax bracket, the maximum federal tax savings available is $300 ($2,000 × 15 percent).

Transferring Funds In Cash or In Kind?

Here’s Harrison, who wants to know how to transfer his existing investments to the robo-advisor Wealthsimple.

“Hi Robb, I read your article about transferring an RRSP to WealthSimple. I was planning to do the same but I have some questions. I have a mutual fund RRSP account with TD and was wondering if i should transfer it to WealthSimple ‘in cash’ or ‘in kind’.”

Hi Harrison, great question! You’ve correctly identified the two ways to transfer your investments from one institution to another.

An in-kind transfer means that the transferring institution sends your existing investments (mutual funds, ETFs, individual stocks) over to the receiving institution exactly as is.

An in-cash transfer means the transferring institution will liquidate your existing holdings and then send the entire amount to the receiving institution in cash.

You can also do a partial in-kind or in-cash transfer. How to choose really depends on four factors:

  1. Your current holdings and whether you want to retain all or a portion of them
  2. The receiving institution’s ability to manage the incoming holdings (for example, a proprietary fund like Tangerine Investment Funds can only be bought, sold, and managed in a Tangerine account)
  3. The tax implications of liquidating investments in a non-registered account
  4. Whether or not you’ll be charged fees (deferred sales charges) for selling the mutual funds

Note there are no tax implications for transferring funds within an RRSP or TFSA, whether in cash or in kind. The funds stay in the same tax-sheltered cupboard, they just move to someone else’s kitchen.

Harrison, in your case you’d most likely want to make the transfer “in cash”, meaning TD will sell the mutual funds and send over the funds in cash. Wealthsimple will then implement your portfolio. 

One final note about Wealthsimple. When you create your in-kind transfer request, you’ll have the option to not sell your holdings and schedule a conversation with a portfolio manager to explain know how to manage your holdings. Wealthsimple will hold any assets with a Deferred Sales Charge or a significant Capital Gain or Loss (in a taxable account ONLY) you’ve asked them not to sell, however, they will not monitor or trade these assets with the rest of your portfolio.

Group RESPs

Melissa wants to know how to get out of a group RESP plan without penalty.

“Hi Robb, my daughter and her husband recently bought a group RESP plan through CST (Canadian Scholarship Foundation). She received the prospectus about a month ago. I see from an article you wrote that if she is under the 60 day point, she can get out of the plan. How can she go about doing this?”

Hi Melissa, she’ll need to contact CST directly and cancel the contract. I’d advise that she do so immediately to avoid any chance that she’s reached the 60 day period. View the prospectus and find the ‘cancellation within 60 days’ clause. Find out if she’ll need to do this in writing, or if a phone call is sufficient. Assume nothing, other than that CST will likely look for any way to keep her in the plan.

There’s a very interesting study on Group RESP subscribers and how these plans are sold. I’d advise her to open an account instead at a bank and contribute only what she can afford. That’s the biggest knock against group RESP plans or scholarship trusts is that they lock you into a pre-determined monthly contribution and the subscriber has no flexibility to reduce or cancel their payments without penalty. With a bank, she can contribute as much or as little as she’d like.

How Early Retirement Affects CPP

Wayne is retiring early but delay taking CPP. He wants to know how his zero-contribution years affect his CPP benefit.

“Hi Robb. I’ve been a faithful follower of your advice and articles. I read with interest Taking CPP at Age 60. I’m planning to retire this year (I’ll be 61), with 41 years service with the provincial government. Here’s my question. I plan to take CPP at 65, but naturally I will stop making contributions this year. Will I get CPP at 65 without a reduction, even though I will not contribute from ages 61 to 65?”

Hi Wayne, thanks for your email. Here’s how I understand it:

You will not lose anything by waiting until 65 and having the last four years of zero earnings, provided that you have at least 39 years of max earnings (which sounds like the case for you).

If you have fewer than 39 years of max earnings, then your “calculated retirement pension” will decrease with the four extra years of zero earnings. This means that you’ll get a larger slice of a smaller pie by waiting until 65.

Check out this free CPP calculator to run your own accurate CPP calculations, or if your situation is more nuanced or complicated then I’d highly recommend getting in touch with Doug Runchey, who, for a small fee, will run some calculations for you.

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10 Comments

  1. J Moore on March 9, 2020 at 7:31 am

    Rob, great stuff. I would like to add that clients can also open RESP accounts with independent, securities licensed financial advisors and not just with “the bank”. They will get the same flexibility with an independent advisor with an individual or family RESP plan and will not be locked in. With an independent financial advisor, they should be less likely to be sold proprietary product.

    • Robb Engen on March 10, 2020 at 9:40 am

      You’re absolutely right. My favourite choice for RESPs right now is the robo advisor Justwealth, who uses a target date fund approach for their RESPs that will automatically rebalance them and lower the risk as your child gets closer to post-secondary age.

    • Gillian on March 12, 2020 at 7:28 pm

      Hi Robb. I understand that if you hold US dividend-paying stocks you will need to pay 15% on any dividend income you make. If you hold these stocks in an RRSP you will not have to pay this tax.

      My question is this: If you hold US dividend-paying stocks as part of an all-in-one, passively managed index ETF, held in your TFSA, will you have to pay this tax?

      Thanks – Gillian

      • Robb Engen on March 13, 2020 at 9:39 am

        Hi Gillian, the usual destination for foreign stocks is an RRSP where the dividends are frequently tax-exempt.

        Unfortunately, this tax, which is collected before dividends are paid to non-residents, is not recoverable inside a TFSA because it’s not recognized by the U.S. as a “retirement account”.

  2. Pam on March 9, 2020 at 3:11 pm

    With the market volatility right now, am I better off to wait until my fund has recovered before moving to something like Wealthsimple? I just wonder if I do an in-cash transfer right now that I am going to “realize” the losses over the last week? Or like all investing do I not try and time the market and just move the money?

    • Robb Engen on March 10, 2020 at 9:45 am

      Hi Pam, if you’re moving registered accounts (RRSP, TFSA) then you should just go ahead and execute your strategy. The nice thing about Wealthsimple is (depending on what kind of investments you’re moving) you can request an in-kind transfer and then ask to speak with a portfolio manager to execute the selling for you once they have control of your funds.

      The key is to avoid or minimize any delay between selling your current funds and purchasing the new WS funds. Markets can move quickly – they fell nearly 10% one day, but can certainly move up just as quickly and you don’t want to be on the sidelines missing out on the recovery.

  3. Jane Hladky on March 9, 2020 at 4:44 pm

    I would like to comment on group RESP’s
    We did this for all 4 of our kids. We have not been disappointed in any way with CST.
    Read the fine print with the banks because we did try one and they required us to send in every single receipts for every book or $ we spent to get the $. With CST it’s way easier – you get the $ when you illustrate your kid is in an eligible plan.
    We made enough to cover tuition and books and put the original principle back in our pockets. No easier way to go – I have friends who lost everything in the 2008 crash and had to start again. This coronovirus-19 crash will be much the same.

    • Robb Engen on March 10, 2020 at 9:49 am

      Hi Jane, group RESPs or scholarship trusts can work out just fine for parents who stick to the payment schedule and whose children attend post-secondary. The risk is getting locked into a payment schedule that you cannot afford, and the penalties that come along with changing or breaking that agreement.

      An individual or family RESP with your bank or investment advisor is a much more flexible way to save for your child’s education. With these plans you can still hold GICs or cash if you don’t want any exposure to the stock market.

  4. Bob Wen on March 10, 2020 at 6:08 am

    Robb, as a result of the recent significant drop in the price of equities, a number of my spreadsheet “time to rebalance” indicators are lighting up. Is it time to rebalance?

    I use greater than •/-10% off target as the trigger to rebalance. I will have to sell units of my bond ETFs and buy equity ETFs to effect the rebalancing.

    Thanks in advance.

    • Robb Engen on March 10, 2020 at 9:53 am

      Hi Bob, some investors rebalance on a time schedule (i.e. quarterly or annually). Others use a threshold like you’re describing. This is a great time to rebalance for those who have access to bonds or cash to buy into this market correction. Makes a ton of sense to me.

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