# Weekend Reading: RRSP vs. RRIF Edition

One question retirees face when setting up their retirement income plan is whether to convert their RRSP to a RRIF or to make withdrawals directly from their RRSP. There are pros and cons to each approach, depending on your age, how much income you require, whether you have a spouse, and where your RRSP account is held.

You’re required to convert your RRSP to a RRIF by the end of the year in which you turn 71, but you can open a RRIF at any time.

The key is that once you establish a RRIF you must begin minimum withdrawals in the following calendar year. The formula is 1/(90-age on December 31 of the previous year) x RRIF market value on January 1st. So, at age 60, with a \$200,000 RRIF balance on January 1st, your minimum required withdrawal would be 1/(90-60) x \$200,000 = \$6,666.67. You can withdraw more than the minimum, but not less.

If you have a younger spouse, you can elect to have the minimum payment calculated based on your spouse’s age. This will reduce your required minimum payment. You must make this election when you first establish your RRIF.

Your minimum required withdrawal is not subject to withholding tax, but of course is fully taxable as income in the year it’s received. If you withdraw more than the required minimum, income tax will be withheld at the source.

Also of note, you don’t have to transfer your entire RRSP to a RRIF prior to age 71. I’ll explain more about that in a minute.

If you are receiving RRIF income when you turn 65, you can split up to 50% of the income with your spouse. In addition, you may be eligible for a federal pension income tax credit of up to \$2,000. Allocating \$2,000 of your RRIF income to your spouse will also allow your spouse to claim the pension income tax credit (assuming you or your spouse are not already receiving eligible pension income).

Alternatively, you can withdraw funds directly from your RRSP. This is often the simplest solution for withdrawals but does come with some issues to consider.

One, RRSP withdrawals are subject to withholding tax upfront from your financial institution. The percentage of withholding tax depends on how much you withdraw in a single lump sum withdrawal:

• \$0 – \$5,000 = 10% withholding tax
• \$5,001 – \$15,000 = 20% withholding tax
• more than \$15,000 = 30% withholding tax

Another issue is that, depending on the financial institution in which your RRSP is held, you may be charged a partial de-registration fee of between \$25 and \$50 per RRSP withdrawal. And it’s not just the big banks. While TD and RBC charge \$25 per withdrawal, Questrade, the supposed king of low cost investing, charges a whopping \$50 per withdrawal.

Finally, direct withdrawals from your RRSP, even at age 65 and beyond, are not considered eligible pension income and therefore not eligible for pension income splitting or the pension income tax credit.

### RRSP vs. RRIF solutions

If you retire before 65 and require income from your RRSP to meet your spending needs then consider making direct withdrawals from your RRSP. You can get around the withholding tax issue by making smaller, more frequent withdrawals. Just keep in mind that the income is still taxable, so if your average tax rate is going to end up in the 20% range and you’re withdrawing less than \$5,000 at a time, you’re going to owe taxes when you file.

But wait, wont frequent small withdrawals also attract those pesky partial de-registration fees? Yes, that’s true. My workaround would be to open an RRSP at a financial institution that does not charge these fees. EQ Bank’s RSP Savings Account is a no-fee account that does not charge fees for withdrawals. This seems like an ideal place to transfer a year’s worth of spending and then make monthly RRSP withdrawals.

Convert your RRSP to a RRIF at age 65 to take advantage of the eligible pension income, which can be split up to 50% with your spouse and allows you to claim the \$2,000 pension income tax credit. Note you can do a partial conversion just to take advantage of the pension income tax credit from age 65 to 71. The idea would be to open a RRIF, transfer as little as \$12,000 to the RRIF, and then withdrawal \$2,000 per year until age 71.

Converting to a RRIF as early as 65 (if you’re retired*) is ideal for receiving eligible pension income, eliminating withdrawal fees, and avoiding withholding taxes on the required minimum withdrawal.

*One reason why I’d hesitate to recommend fully converting your RRSP to a RRIF if you retire before 65 is that you might go back to work or earn some part-time income – in which case you wouldn’t want to have a large minimum required (and fully taxable) withdrawal from your RRIF. Heck, you might earn enough income that you still want to make an RRSP contribution. So, leave yourself some flexibility there.

## This Week’s Recap

Framing has started on the new house! We’re fortunate to live nearby and can visit regularly on our daily walk to check on the progress. It’s exciting to start to see floors and walls and see the rooms take shape. We just need a roof, among other things, before they can get to the fun stuff inside (and before winter!).

Last week I opened the money bag and answered reader questions about creating retirement income, money resources for beginners, and comparing all-equity ETFs.

Many thanks to Nomadic Samuel at Picture Perfect Portfolios for the fun interview about how I invest my money. He titled it, Buy the Entire Market for as Cheap as Possible and then Move on With Your Life. I love it! Curious readers can check out the rest of the series here.

## Promo of the Week

A good portion of my freelance writing comes in USD and for years I lazily accepted that money in USD via PayPal, which is subject to some absurd foreign currency conversion rates and fees, and then transferred to my Canadian business account.

A friend recently turned me on to Wise (formerly TransferWise) where I was able to set up a USD account to receive the funds from PayPal fee-free. Then I transfer the funds from Wise to my Canadian business account and pay a LOT less in fees. I’m talking hundreds of dollars in a few short months.

Wise has a referral link where you can get a fee-free transfer of up to \$800 CAD when you sign up for an account. Check them out if you’re looking for a cheaper way to exchange money.

Has the time finally come for reverse mortgages? A thorough look at this polarizing product in the latest ROB Magazine.

Portfolio manager Markus Muhs shared a terrific and timely piece called first aid for volatile markets. Read it now, and bookmark it for the next time Mr. Market gets in a mood.

Michael James on Money shares some good, but often ignored, investing advice – nobody knows what will happen to an individual stock.

I always suggest that my clients prepare what I morbidly call an. “in case I die file”. Here, the Blunt Bean Counter blog explains how to prepare such a file for your spouse.

The province of Ontario is set to regulate the title “financial advisor”, which sounds great in theory but has become a watered-down mess in practice as regulators bowed to industry pressure and allowed an industry lobby group to put forward its own low-bar title of Professional Financial Advisor for approval:

“Creating a system where the threshold to be a financial advisor is the same as someone who is able to sell a mutual fund means that any mutual fund dealing representative could become a financial advisor, essentially through a rubber stamp of the industry,” said Jason Pereira, President, The Financial Planning Association of Canada.

Want to take on the CRA? Jamie Golombek shares his own fight with the taxman over home office expenses.

Is it time to give up on global diversification? PWL Capital’s Peter Guay reminds us why global diversification remains a cornerstone of good portfolio management.

An interesting look at how advice-only planning exposes what’s wrong with asset-based fee models:

“When it comes to the fees, advice-only is about as transparent as it gets. Whether charging hourly, flat-fee, retainer or even a fee tied to net worth or income, the absence of an investment account to draw quarterly fees from forces a full and open presentation of an actual bill for service.”

Life doesn’t just move in a straight, linear fashion. That’s why online retirement or investment calculators are a less than reliable way to map out your future. Ben Carlson agrees, saying reality is messier than spreadsheets.

This Humble Dollar blog post neatly captures many of my own conversations with clients who have more than enough saved but who can’t even contemplate retiring.

Anita Bruinsma at Clarity Personal Finance smartly shares how not to compete with the investment professionals.

Millionaire Teacher Andrew Hallam agrees, saying don’t believe the hedge-fund hype – you’re better off in index-tracking ETFs.

Of Dollars and Data blogger Nick Maggiulli answers whether you should invest more after the market declines? I liked this part:

“My question is: where do you get this extra money from? Do you conjure it up with a spell? Do you print it at home? Do you raise it from friends and family?

All jokes aside, this is the primary issue with this “invest more during declines” strategy. It has to have money sitting on the sidelines waiting to be invested in order to succeed. However, as I have illustrated before, this will lead to less money most of the time.”

Finally, Erica Alini wrote this heartbreaking piece explaining that for Canadians with rare diseases, access to treatment can affect financial survival, too.

Have a great weekend, everyone!

1. Terry Newcombe on September 24, 2022 at 7:37 pm

Rob, you say “Questrade, the supposed king of low cost investing, charges a whopping \$50 per withdrawal”. But Questrade.com’s “Transfers & Withdrawals” page online says they have free Electronic Fund Transfers up to \$50k, and it also says they charge \$25 for a “Partial transfer of account to another institution”. Is one of those two what you call a withdrawal? I’m confused. Thanks in advance.

2. Rod on September 24, 2022 at 8:40 pm

Great information Rob. I took early retirement and have just started to withdraw funds from the RRSP to try and bring the balance down in the hope of avoiding OAS clawback down the road. Quick question that I have never seen addressed anywhere before…..My wife has an RRSP and Spousal RRSP. At 71 can they be combined into a single RRIF, or do they have to go into two separate RRIFs, each with minimal withdrawl requirements? I am thinking that when my wife takes early retirement it might be best to draw down the SRRSP first (smaller of the two accounts) with the aim to close it out completely before it has to convert to a RRIF. Does that make sense?

Thanks

• Robb Engen on September 25, 2022 at 10:24 am

Hi Rod, thanks for the kind words. The spousal RRSP will become a spousal RRIF so, yes, it will be separate from the regular RRSP/RRIF and have its own minimum withdrawal requirements based on the account balance.

As for which to draw down first, impossible to say without knowing your required spending needs and other sources of income.

3. Mary McDaid on September 25, 2022 at 5:52 am

Great article. For so many, these options are all a mystery until they get close to retirement. One thing I might add: we both had both RRSP’s and LIRAs. Our pensions plans were Defined Contribution and both consisted of some portion that was “Locked In”. These funds must be migrated to a LIF (instead of a RRIF) in order to draw income. And besides minimums, they also have maximums, determined by the province of origination and the type of plan. For example, as I worked in Telecom, I have a federally regulated plan originating out of another province (Ontario). The maximums are very stringent, depending on the plan, so even in times of great growth, I am restricted to quite small withdrawals from this particular LIF. This is a challenge that is going to face many people with DC Registered Pension Plans. The pension companies rarely explain such details up front, so the onus is on the pensioner to ask plenty of questions understand the machinations of such plans in advance.

• Robb Engen on September 25, 2022 at 10:29 am

Hi Mary, thanks! Yes, LIRAs are becoming more prevalent with the advent of DC pension plans (and employees changing jobs more frequently). As you point out, LIRAs turn into LIFs and LIFs are subject to both a minimum and a maximum annual withdrawal. There is a provision that allows you to transfer 50% to 100% of the LIRA to your RRSP (depending on the jurisdiction of the pension), and this typically must occur within 60 days of converting your LIRA to a LIF.

You can also move your LIRA from the original pension plan into a self-directed account – another feature not clearly explained up front.

4. Jennifer on September 25, 2022 at 7:15 am

Thanks for this article – I’ve been toying with the logistics of this exact early withdrawal scenario, especially since my husband is several years older than I am. Any idea how the Invest vs Trade side of WealthSimple charges for RRSP withdrawals? Trying to figure out if it makes a difference where our money is post-retirement; we currently have money on both sides of the WealthSimple offerings (so far, my Trade side is doing a slight bit better than the Invest side).

• Robb Engen on September 25, 2022 at 10:38 am

Hi Jennifer, RRSP withdrawals are free at WS Trade as well (subject to withholding tax, of course).

One thing to note is that WS Trade, currently, does not offer RRIF account types and so if that hasn’t changed by the time you turn 71 you’ll need to transfer your RRSP somewhere else (WS Invest does offer RRIF account types).

5. Gary on September 25, 2022 at 10:17 am

Hi there
I think some of the banks have a feature where you can have an rrsp with their online brokerage and an rrsp chequing type account at the bank/branch level. Transfer from brokerage to bank level…then to chequing acct…only pay withdrawal tax.

• Robb Engen on September 25, 2022 at 10:40 am

Hi Gary, thanks for this – a very practical solution and workaround for those partial de-registration fees. I mentioned the EQ Bank RSP as a way to earn some interest on that cash for the year, but the RSP chequing account solution would keep things simple.

6. Peter James on September 25, 2022 at 2:31 pm

If you open a RRIF, you can (probably) make no-fee transfers from your RRSP to your RRIF (definitely can do at TDDI & Questrade). Then you can make no-fee withdrawals from your RRIF. If you do this after Dec 31st in the preceding year, and withdraw all of it by Dec 31st of the current year, there’ll be no CRA-mandated withdrawal the next year.

• James R on September 26, 2022 at 11:27 am

This is addressing my main question, which is, if I take \$12,000 from my RRSP and create a RIF at age 65, and I intend to use the \$2,000 tax credit over the next six years – can I transfer additional funds into that same RIF account at a later date? Do those funds have to originate from the same RRSP?

Or, every time I move money out of my RRSP do I have to create a new RIF account?

If I can transfer from RSP to existing RIF how does this impact the minimum withdrawal rules – is the calculation done on January 1st balance? Max balance? Min balance?

7. Wilbon on September 25, 2022 at 5:47 pm

HI Rob,

8. jacqueline on September 25, 2022 at 8:40 pm

Thanks for the great article and especially for noting the varying withdrawal fees . These can add up quickly and often get overlooked I like your suggestion on how to get around it!

I plan to transfer the 50% allowable amount (in Ontario) from a LIRA to an RRSP. I have 2 LIRA accounts, each at a different financial institutions . Would I have to transfer 50% from each account, or would I be able to transfer 50% from one LIRA account , based on the combined total of both LIRA accounts?

• Robb Engen on September 26, 2022 at 12:05 pm

Hi Jacqueline, I believe you’d have to treat these LIRAs separately. So, if you’re ready to convert them to LIFs and you want to transfer 50% of the balances, then you’d have a 60 day window to make those transfers to your RRSP. If you only want to do that with one LIRA, then 50% of that LIRA’s balance would be eligible to transfer to your RRSP.

9. Gary on October 11, 2022 at 3:25 pm

One more comment on this. I believe that WealthSimple doesn’t charge any withdrawal fees from any of their accounts, including RRSPs and TFSAs. Not exempt from RRSP Tax Withholding though!

10. Jo-Anne on October 12, 2022 at 3:13 pm

Was pretty excited to read your strategy of avoiding de-regulation fees and earning some interest by transferring RRSP cash from TD RRSP to EQ RRSP. Sadly, TD informs me that they will charge a transfer fee of \$150 for each transfer, and EQ will not reimburse any transfer fees. So, essentially, I would be spending \$150 to save \$25!

• James R on October 31, 2022 at 11:14 am

This is why I will move the portion of cash I expect to withdraw for a given year into a RIF first – and then I’ll withdraw it / transfer it to where I want it to sit (such as EQ bank) as I use it.

11. Janet on November 14, 2022 at 7:18 am

Hi Robb,
Thanks for the article. Words of warning for BMO Investorline account holders. I had 2 RRIF accounts between ITrade and BMO Investorline at the end of last year. I turned 60 in September and had planned to withdraw down the full value of my RRIFs over the next 5 years. Leaving my LIRA to accumulate over the next 5 years. The RRIF payment resulted in a higher than the minimum payout. I understood and accepted the tax implications, I was shocked to see that BMO was taking the deregistration fee from my RRIF withdrawals in addition to the taxes. The explanation was that they treated the withdrawals from the RRIF as though they were RRSP withdraws even though the funds were invested in a RRIF. Needless to say – those funds have been transfered out and all of my Investorline accounts have been closed!

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