My RRSP is Converting to an RRIF, What Should I Do?
Like many, your RRSP (Registered Retirement Savings Plan) may be your primary pension savings vehicle, especially with fewer and fewer employers providing defined benefit pension plans. On conversion of your RRSP to a RRIF (Registered Retirement Investment Fund), your RRIF may become your primary source of retirement income.
An RRIF can be thought of as an extension of an RRSP. While your RRSP is used to save for your retirement, an RRIF is used to provide income during your retirement.
After spending years investing for your retirement, you will be able to finally enjoy the benefits of your savings.
What is an RRSP? What is a RRIF?
RRSP (Registered Retirement Savings Plan)
An RRSP is a savings plan that is registered with the Canadian government to which you contribute for retirement purposes. Your contribution is limited to a maximum amount based on your prior year’s earned income.
The contributions you make are tax-deductible in the year you make them. Investment income earned within an RRSP and any growth in value of your investments are tax-free, but a withdrawal from your RRSP is taxed in the year you make the withdrawal.
RRIF (Registered Retirement Investment Fund)
A RRIF is similar to an RRSP in that you can benefit from the same tax-deferred investment income and growth that you can in an RRSP.
The main difference is that you cannot make contributions to a RRIF – you can only set up a RRIF by transferring property into it from another registered plan, including your RRSP.
As well, you must make government-specified minimum annual withdrawals from a RRIF beginning the year after you set it up. The amount you withdraw is added to your taxable income for that year.
Why Put Your Money in a RRIF?
There are many reasons to put your money into a RRIF. Listed below is an array of benefits to setting up a RRIF.
- There are no taxes paid on conversion of an RRSP to a RRIF.
- You don’t pay taxes on investment income and growth earned in an RRIF as long as it stays there. You only pay taxes on the amount you withdraw each year.
- Other than pre-set government minimums, you can withdraw as much as you need each year.
- Minimum withdrawal requirements can be based on your spouse’s age which could provide tax savings if your spouse is younger.
- You can hold a wide variety of investments in a RRIF.
- A RRIF provides some creditor protection in the event of bankruptcy.
- On conversion, RRSP investments do not have to be sold, they can be rolled over “in kind” to a RRIF.
- You can leave your RRIF to your spouse tax-free if they are named as your beneficiary.
- As RRIF income is considered pension income you can split the income up to 50% with a spouse which could mean substantial tax savings.
How Do You Convert an RRSP to a RRIF?
You can convert your RRSP to a RRIF at any age, but the latest you can do it is by December 31st of the year you turn 71. You cannot own an RRSP after this date.
Your RRSP must be converted to a RRIF or another form of an annuity — or you must withdraw it as a lump sum where the total is treated as taxable income and will have significant income tax consequences.
For the reasons stated above it is most practical and tax efficient to convert your RRSP to a RRIF.
Conversion Steps:
- Complete the RRIF Application. You should begin this process well before Dec 31 of the year you turn 71 so that you do not experience a deemed lump sum withdrawal of your RRSP.
- Choose your investment options: If not rolling over your RRSP “in-kind”.
- Choose a beneficiary: You are required to specify a beneficiary such as your spouse or other dependent family member who can receive the RRIF balance tax free on your death. Non-family members can be named beneficiaries but will have to pay taxes.
- Choose a withdrawal schedule: You must begin withdrawing funds from your RRIF the year after you establish it. The annual minimum required withdrawal is specified by the federal government. The percentage withdrawal increases as you age. You can choose to withdraw monthly, quarterly, semi-annually, or annually. There is no maximum withdrawal amount.
Get the Help you Need
Retirement planning and tax planning go hand in hand. It is best to consult with a tax planner to ensure that you are not paying more taxes than you need to on the retirement savings you have spent so long accumulating.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.