Weekend Reading: When To RRIF Edition

Weekend Reading: When To RRIF Edition

One chief concern for retirees and the soon-to-be retired is when to convert their RRSP to a RRIF. A common misperception is that this conversion has to take place in the year you turn 71.

While it’s true that your RRSP must be closed by December 31st of the year you turn 71 and the funds withdrawn, converted to a RRIF, or used to purchase an annuity, you can choose to open a RRIF at any time. Once a RRIF is opened, you’re required to make minimum withdrawals from it starting the year after the RRIF was opened.

Age on Jan 1RRIF min. withdrawal %

Why would anyone want to open a RRIF before age 71?

Save on withdrawal fees

Withdrawals directly from your RRSP are often subject to something called a partial de-registration fee. Depending on the financial institution, these fees can range from $35 to $50 per withdrawal. 

If you planned on making monthly withdrawals, that can add up to $600 per year in unnecessary fees.

Conversely, withdrawals from a RRIF are not subject to any such fees.

Better manage withholding taxes

Withdrawals directly from your RRSP are also subject to withholding tax.

  • $1 to $5,000 = 10% withholding tax (5% in Quebec)
  • $5,001 to $15,000 = 20% withholding tax (10% in Quebec)
  • $15,001 and up = 30% withholding tax (15% in Quebec)

Conversely, the minimum required withdrawal from a RRIF is not subject to withholding tax (although it is of course still considered taxable income and you can elect to have taxes withheld).

Note that any amount withdrawn over and above the minimum is subject to the same withholding tax schedule as the RRSP.

Take advantage of pension splitting and a tax credit at age 65

Perhaps the best reason to convert your RRSP to a RRIF early is to take advantage of pension income splitting and the pension income tax credit.

Again, a withdrawal directly from an RRSP is simply considered taxable income.

But a withdrawal from a RRIF at age 65 and beyond is considered eligible pension income (just like defined benefit pension income) and up to 50% can be split with your spouse. Only the withdrawing spouse needs to be 65, so they can indeed split their pension income with a younger spouse.

Pension income from a RRIF also qualifies for a $2,000 non-refundable pension income tax credit, which can save you $300 in taxes.

Partial RRIF

There’s no need to convert your entire RRSP to a RRIF before age 71. A sensible strategy can be to open a RRIF and transfer a small balance from your RRSP.

This “partial RRIF” means lower minimum mandatory withdrawals. This can be handy for early retirees who think they may still earn some employment income from part-time work, for example, or for those who just want to maintain flexibility and not be subject to larger mandatory withdrawals.

Even a modest partial RRIF of $12,000 can give retirees a $2,000 per year withdrawal that qualifies them for the full pension income tax credit from age 65 to 70.

This Week’s Recap:

Last week I shared a guest post from insurance expert Glenn Cooke on advanced term life insurance strategies.

Next week I have another guest post from my good friend Kyle Prevost, who has put together an incredible resource on retirement planning. You’ll want to check this out!

If you’re still invested in one of these cookie cutter balanced mutual funds, and getting nothing more than a phone call once a year (if that) from your bank advisor at RRSP season then we need to chat about my fee-only financial planning service to see if it would be a good fit for you.

Or, check out my DIY Investing Made Easy video series where I walk you through the exact steps to take control of your own investments and reduce those fees by up to 90%.

Promo of the Week:

Part of my revenge travel escapades involves collecting a massive amount of American Express Membership Rewards that I can either transfer to Aeroplan to redeem for flights (preferred) or to Marriott Bonvoy to redeem for hotels.

That means optimizing my every day spending with credit card rewards points. I do this with the American Express Cobalt card – an absolute no-brainer for earning 5x points on groceries, dining, and take-out (eats and drinks). It’s the top credit card in Canada for earning rewards on everyday spending.

But I also need to take advantage of new credit card sign-up bonuses from time-to-time to boost my rewards.

Amex Business Gold

The best one on the market right now by far is the American Express Business Gold Rewards Card, where you get a welcome bonus of 75,000 points when you spend $5,000 within the first three months.

Don’t you need a business to apply? Technically, no. With the growing gig economy from side hustles and small entrepreneurial endeavours, your business can simply be First Name Last Name Inc.

Want another travel hack? Sign up for the American Express Business Card and meet the minimum spend requirements to get your 75,000 point welcome bonus, then use your own Amex referral link to refer your spouse or significant other.

You’ll get up to 30,000 more points as a referral bonus, and your partner can get the 75,000 point welcome bonus as well (after meeting the minimum spend requirements). That’s 180,000 Membership Rewards points!

Transfer those points to Aeroplan where they can typically be worth 2 cents per mile. That’s $3,600 worth of flight rewards.

Yes, there’s a $199 annual fee ($398 if you each have your own card). But that’s still a net gain of $3,202. Travel hacking at its finest!

This strategy is called activating Player Two, so instead of having a secondary credit card for your spouse on the same credit card file, each spouse opens their own account.

Deploy the same strategy for the American Express Cobalt Card.

Weekend Reading:

Congratulations to long-time My Own Advisor blogger Mark Seed for paying off his mortgage. Now for the difficult decisions around what to do with the extra cash flow. Continue working full-time and save more? Continue working full-time and spend more? Reduce to part-time work? All good options to consider.

I appreciate the transparency from the recently retired Michael James, who shares his investment returns from 2023.

Here’s another one from Michael James, with some tough questions for the retirement experts that were recently interviewed on the Rational Reminder podcast.

Rob Carrick on why the first four months of the year are a ‘danger zone’ for TFSA contributors. I agree. All the more reason to keep good records of your own TFSA contributions and withdrawals.

Investors are worried whenever stocks reach all-time highs. But, as PWL Capital’s Ben Felix explains, saying that stock market valuations are high misses a lot of nuance. Which stocks are we talking about, and even more broadly, which markets?

A Wealth of Common Sense blogger Ben Carlson answers a reader question about whether you can live on dividends from the stock market?

A great post from The Loonie Doctor about his wealth journey, including a warp-speed trip along the hedonic treadmill – a common occurrence for high earning physicians and other professionals.

The human trait that causes Canadians to take their CPP benefits early (subs):

“It’s such a common phenomenon that it has a name in behavioural science: present bias. It’s the tendency to focus more on the present than the future when making decisions. It can lead us to overvalue immediate rewards and undervalue longer-term ones. Scientific studies show that most people prefer to receive money sooner, even if we know that we could get more if we wait.”

I also think the eligibility letter that Service Canada sends out to 59.5 year-olds saying they can apply for their CPP is a poorly designed “nudge” that leads people to take their benefits earlier than needed.

Here’s A Wealth of Common Sense blogger Ben Carlson again with the historical rate of return on housing. Hint: not as good as you’d expect.

In Fred Vettese’s Charting Retirement series at The Globe & Mail, he answers whether gold is a good hedge against inflation (subs):

“As for the most reliable hedge against inflation, it just might be a traditional portfolio of stocks and bonds.”

Finally, advice-only planner Anita Bruinsma smartly explains why it’s a good thing that bank cards and digital payments are the norm for teenagers today.

Have a great weekend, everyone!

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  1. Loonie Doctor on January 27, 2024 at 1:18 pm

    That partial RRIF tip to get the pension credit is a nice one!

  2. Victoria on January 27, 2024 at 4:06 pm

    We goofed on the RRIF withdrawal of $2000 to get the credit. It ended up being an excess withdrawal which triggered a withholding tax plus a de-registration fee. Silly us. You live and learn!

  3. Curt on January 27, 2024 at 4:17 pm

    Robb, I not sure enough can ever be said about the importance of avoiding the fees while not appreciably increasing the risk by not choosing funds like those described by Kyle Prevost. Avoiding those fees pays us $14,000.00 a year, every year. And those savings go on to grow for us every year. Moving away from those relentless fees is the smartest financial move we have ever made.

  4. Deborah S. on January 27, 2024 at 4:32 pm

    Robb, I wish that”reputable” bloggers and “serious” news outlets would stop posting on X/Twitter. Continuing to support Elon Musk isn’t a good look!

    • Robb Engen on January 27, 2024 at 5:18 pm

      Hi Deborah, I totally get where you’re coming from. I’ve heard lots of talk of people moving to other platforms (Blue Sky, Mastodon, Threads, etc.) but none of them seem to have any staying power. And is Zuckerberg any better?!?

      In the meantime I’ll quietly protest by never ever buying a blue check mark.

    • Drew on January 28, 2024 at 7:45 am

      Agreed Deborah. Standing up for ethics may not be convenient or easy Robb. I similarly encourage you and other Canadian personal finance leaders to stop posting on X/Twitter.

  5. Alex on January 28, 2024 at 12:02 pm

    Is it possible to do a partial RRIF conversion of $X in cash in December and withdraw all of it in following January? Does the RRIF account remains open to new cash input next December?

    • Robb Engen on January 28, 2024 at 1:12 pm

      Hi Alex, in my experience working with clients I’ve found two institutions DID NOT allow a complete withdrawal of the entire RRIF balance. The clients ended up setting up a partial RRIF with two years worth of expected withdrawals.

      • Alex on January 28, 2024 at 2:17 pm

        Thanks Robb!

        It is possible these institutions prevent emptying the RRIF account in order to avoid having to close it (and later reopen it).

        I guess withdrawing $X-1 would be sufficient to keep the account alive, without maintaining two years of withdrawal.

        This is something I’ll have to dig a bit more.

        • Robb Engen on January 28, 2024 at 3:20 pm

          Alex, that’s exactly what I think. And it makes sense, to be fair. A RRIF is likely a pain to administer, so they want you to open one and stick with it.

  6. E on January 28, 2024 at 3:04 pm

    To your knowledge, what do the points on AMEX translate to? Just a couple weeks ago, I went from the Dividend (cashback) to the Infinite version. Because it’s cashback directly, I know what I’m getting. But does 5x points translate to equivalent of 5% cashback? I’ve seen that AMEX being mentioned a lot as being great but… *shrug*.

    • Robb Engen on January 28, 2024 at 3:23 pm

      @E – it depends what you redeem them for but at minimum they’re worth 1 cent per point. So 5x points is literally 5% back – it’s the best earn rate out there.

      I transfer them to Aeroplan where I can typically redeem points for 2 cents per mile. In that case I’m getting 10% back on my Amex Cobalt spending. It’s no joke.

  7. Patricia Willis on January 29, 2024 at 6:13 pm

    There is no point in opening a RRIF before 65 though correct? You don’t get the pension credit until after 65, what I understood from the CRA website.

    • Max on February 2, 2024 at 6:50 am

      Technically, you can open it one year before you turn 65 since you are not required to draw the minimum until the following year; the year you can start claiming the Pension Income Tax Credit.
      There is no benefit to doing it earlier than that.

    • Robb Engen on February 2, 2024 at 7:03 am

      Hi Patricia, the first points I mentioned in the article would still apply as a benefit for opening the RRIF earlier than 65. No partial deregistration fees on withdrawals, like there would be directly from an RRSP, and a slightly better management of withholding taxes since there is no withholding tax applied to your minimum RRIF withdrawal.

  8. Bob S on January 29, 2024 at 6:30 pm

    One way I use RRSP to RRIF conversion is to limit withholding taxes. If I want to withdraw $30k from registered plans, I can move $15k from RRSP to RRIF and withdraw and also withdraw $15k from my RRSP. That reduces the withholding taxes from 30% to 20% on the “second” withdrawal. I do end up paying a second de-registration fee on the RRSP withdrawal, but I get to keep the bulk of the reduced withholding tax.
    As long as there is no net tax owing come tax season, the CRA will not try to hit you up for installment payments and even if they do, these payments will be smaller as long as your marginal rate is 30% or less.

  9. Amit on January 30, 2024 at 1:41 pm

    Hi Robb, In the article you wrote “Even a modest partial RRIF of $12,000 can give retirees a $2,000 per year withdrawal that qualifies them for the full pension income tax credit from age 65 to 70.”

    I didn’t get the math on the withdrawal. The min. withdrawal of 4% on $12,000 should be $480. If you could elaborate that would help. Thanks

    • Max on February 2, 2024 at 6:42 am

      The minimum is $480, but that does not prevent you from withdrawing $2000 per year to get the maximum tax credit.
      IMO, this ‘tweak’ is often oversimplified to $12k in, 6 x $2k out.
      You can use this tax credit for draws after you turn 65, including that year.
      So you draw $2k in year 1 (65), $2k in year 2 (66), $2k in year 3 (67), $2k in year 4 (68), $2k in year 5 (69) , $2k in year 6 (70)and $2k in year 7 (71). In year 8 (72), you will be drawing the regular RRIF income as in year 7(71) you had to convert all remaining RRSPs.
      If you do the math, that is 7 withdrawals of $2k. If the initial $12K in the RRIF is earning ~5%, that should about cover the seven $2k withdrawals, otherwise, you may need to transfer a bit more.

  10. Dan on February 8, 2024 at 7:19 am

    Why do you recommend taking CPP early if you expect to draw GIS? My draft plan is actually to defer CPP to 70 as “insurance” and to take advantage of GIS 65-71 as I can qualify. Otherwise my GIS would be reduced by 50% of the CPP received during the 65-71 period.

    Are you assuming a scenario where one simply can’t wait until 70 to draw CPP, and by taking CPP at 60 the resulting GIS reduction at 65 will be smaller? Thanks.

  11. Confused about RRIFs on February 9, 2024 at 10:15 pm

    RE: Partial RRIF before age 71

    Have searched far and wide for information on how exactly to “fund” a RRIF from an RRSP, and your site comes closest, particularly here in the comments/discussion. However, am still looking for a clear explanation (perhaps with a detailed example) of the use of various terminology being used on various sites, including “converting” an RRSP to a RRIF (which makes it sound like one would need to “turn” an entire RRSP account (with 100% of its holdings – e.g. a variety of GICs) into the RRIF and then start making withdrawals; versus use of the term “transferring” (which sounds like “moving” – some/partial) of an RRSP account’s holdings (any amount(s) one determines at one or more points in time) into an opened RRIF account – use of these terms is a bit confusing.

    Questions – all with respect to using a RRIF prior to age 71:

    (1) If one wishes to open a RRIF before age 71, is it required to “convert/transfer” an RRSP account (with all of its holdings, at once) into the opened RRIF, or
    (2a) Can one open a RRIF account and move only a portion of the RRSP account’s holdings into the RRIF?
    (2b) If one can move only a portion of the RRSP account’s holdings into a RRIF, is it also then required that the RRIF be continued to be “funded” on a continous ongoing basis (i.e. moving more RRSP funds into the RRIF when the RRIF is depleted?) Or, can the RRIF be depleted and closed down if additional monies from RRSPs are not needed/desired prior to age 71?
    (3) If one has more than one RRSP account – eg. at various institutions – is it required that each RRSP be converted/funds transferred proportionally, or can RRSP holdings at bank (A) be converted/partially transferred into a RRIF and drawn down, while the remaining RRSP account holdings at bank (A) and bank (B) remain in the RRSPs.

    Thank you for any additional clarity you can provide – hope these questions makes sense

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