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.
About the RRIF
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).
About the RRSP
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.
Retirees, do you have anything else to add about making withdrawals from a RRIF versus directly from your RRSP? Leave a comment and let us know!
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.
Weekend Reading:
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!
