Converting Your RRSP to a RRIF

While most Canadians in the saving stage of their lives are happily contributing to and saving money on taxes with the RRSP (Registered Retirement Savings Plan), their older contemporaries are dreading the RRSPs close cousin, the RRIF (Registered Retirement Income Fund).

The RRSP is a fantastic savings plan that is nearly always the best account to prioritize when saving for retirement. When you contribute to your RRSP, you get to deduct the exact amount of your contribution from your annual income at tax time. This means you are effectively contributing to your RRSP with "before-tax" money. Contributing with before-tax money helps you maximize your savings and minimize your tax bill.

However, the RRSP has a few catches. Withdrawals from your RRSP are fully taxable as regular income. Also, you are subject to tax withholding on RRSP withdrawals. For example, if you want to withdraw $20,000 from your RRSP, the bank will withdraw an extra $8,571 and send that money straight to the Feds for a total withdrawal of $28,571.

When you do your income tax filing, months later, that $8,571 will show as taxes already paid. Your total RRSP withdrawal (taxable income) will show as $28,571. Then, if the bank withheld too much money from your RRSP as part of the mandatory tax withholding, you get a tax refund bank for that same amount. If you should owe no tax at all based on your income and deductions, the CRA will send the entire $8,571 back to you.

This hefty tax withholding is not an accident. While the government wants you to save in your RRSP, they also want to discourage you from withdrawing money from your RRSP until you are retired. While the benefits of discouraging early RRSP withdrawals probably outweigh the costs overall, it is certainly inconvenient for a high saver, early retiree.

The account the government wants you to withdraw from is the close cousin of the RRSP--the RRIF.

An Overview of RRIFs

The RRIF is the withdrawal-only version of the RRSP. You cannot contribute to a RRIF and you must make minimum withdrawals every year based on your account valuation and age on December 31 of the previous year. It is important to note that you can use the age of the younger spouse when calculating your RRIF factor minimum withdrawal.

In your RRIF, you may invest the money in the exact same instruments as a RRSP. This also includes holding your own non arms length mortgage. When moving money from your RRSP to your RRIF, you should be able to transfer those investments over "in-kind". Also, the transfer and any asset sales within your RRSP or RRIF account are not considered taxable events.

To calculate the minimum amount of your withdrawal, use your age on December 31 of last year, find your RRIF factor, and multiply that by your RRIF account value on December 31 of last year. For example, if my 65th birthday is in February of the current year and my RRIF account valuation on December 31 of last year was $300,000, my minimum withdrawal for this year is $11,539 ($300,000 * 3.8462%). I must withdraw at least $11,539 sometime between January and the end of December of the current year.

This is the minimum withdrawal factor table from age 50:

Source: TheRichMoose

Every RRSP account must be converted to a RRIF account in the year that the account holder turns 71. However, anyone holding an RRSP account may convert a part, or all, of their RRSPs to a RRIF at any age.

Benefits of Withdrawing from a RRIF

There are a few reasons why someone under the age of 71 would voluntarily want to convert their RRSP to a RRIF. Even in these circumstances, I believe it is generally best to convert just part of your RRSP to a RRIF to take advantage of the benefits. Leave an active RRSP account in place so you have the option of contributing and getting tax breaks should your circumstances change.

1. Take advantage of pension income tax credit

If you are 65 or older, you are eligible to claim the pension income tax credit for certain forms of income. Pension income includes RRIF withdrawals, but does not include standard RRSP withdrawals.

The pension income tax credit will give you a $2,000 deduction at tax time, helping you save hundreds of dollars a year in tax. The exact amount will depend on your income and province of residence.

If this is your goal, you should be careful only to transfer enough money to your RRIF from your RRSP to take advantage of this credit.

2. Splitting income with your spouse

If you are over the age of 65, and you are eligible for the pension income tax credit, you can also split up to 50% of your qualified pension income (includes RRIF withdrawals) with your spouse. Splitting income with a spouse is a huge tax benefit that can cut your tax bill in half.

For example, if you spend $50,000 per year in Ontario, you would have to withdraw $56,500 as an individual, but that drops to just $53,200 if it is evenly split with your spouse. Never say "No" to saving an easy $3,300 per year on taxes alone.

If you have a large RRSP, but your spouse does not, then moving a substantial portion of your RRSP to a RRIF at age 65 could be well worth your while just to take advantage of income splitting and saving money on tax.

3. Save money on withdrawal fees

Most brokerages will charge a higher fee for RRSP withdrawals than they do for RRIF withdrawals. This is because RRSP withdrawals are considered a partial de-registration. The brokerage fee for a RRSP withdrawal will probably be in the range of $50. A withdrawal from a RRIF can be anywhere from free to $50 at most brokerages.

If you are only doing one withdrawal per year, which I recommend if you are doing a RRSP withdrawal for the tax free RRSP withdrawal plan, switching to a RRIF to save fees probably isn't worthwhile. But, if you are looking for steady monthly income by way of registered plan withdrawals, it is almost certainly better to move at least a good portion of your RRSP to a RRIF.

4. Avoiding income tax withholding

When you withdraw money from a RRSP account, the brokerage is obligated to withhold anywhere from 10% to 30% of the value of the withdrawal and remit that to the CRA as an advance on your income tax bill for the year. However, up to the minimum withdrawal amount based on your RRIF factor, your brokerage will not withhold any money for taxes on RRIF withdrawals.

If you know you are withdrawing a certain amount of money from your RRIF every year, it may be worthwhile to convert some of your RRSP to a RRIF. I should point out that the argument here is weak because you will get any excess taxes withheld from you refunded back in March or April when you do your taxes.

The income tax withheld on RRSP withdrawals is not a separate tax from income tax itself, it is simply an advance to the CRA to discourage you from making withdrawals from your RRSP, and ensure the government gets paid their due. It is no different from your employer withholding tax from your paycheque or the CRA requiring you to make installment tax payments throughout the year if you are self-employed.

Summary

In general, I believe it can be advantageous from a tax savings and fee savings perspective to convert part of your RRSP to a RRIF when you turn 65 and are otherwise eligible for the pension income tax credit. Be hesitant to convert your entire RRSP over to a RRIF before the age of 71. Doing so will limit your options to contribute to a tax advantaged account and reduces withdrawal flexibility.

You can move money from your RRSP to a RRIF in chunks every year, so it is often worth your while to do some math and find an optimal RRIF balance to maintain for your personal situation. When in doubt, err on the side of caution and keep your RRIF a bit smaller than your calculations would suggest the maximum amount should be.

You are not required to open your RRIF at the same brokerage where your current RRSP is held. Examine your options and look at the fees for each brokerage. While some online self-directed brokerages charge annual fees and withdrawal fees for RRIF account, others do not. Look for low cost options and save yourself hundreds of dollars in fees each year.

Once you have opened a RRIF, think about your overall withdrawal plan and your investment situation. To keep your finances easy to manage, it may be a good time to open a high interest savings account. Consider making withdrawals from your RRIF just once or twice each year and depositing that money in the savings account.

Make your minimum withdrawal amount based on your RRIF factor at the beginning of each year as no tax withholding is kept from this withdrawal. Make any additional withdrawals near the end of the year to reduce the amount of time the CRA is holding onto your money. Don't forget you may be realizing taxable income from other sources (dividends or interest from non-registered investment accounts, rental properties, CPP/OAS, etc.) throughout the year.

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3 Replies to “Converting Your RRSP to a RRIF”

  1. “if you want to withdraw $20,000 from your RRSP, the bank will withdraw an extra $8,571 and send that money straight to the Feds for a total withdrawal of $28,571.” I have never done a withdrawal from a RRSP, but I always assumed that if I withdraw 20K, then I would get around 14k, while the withheld amount would be around 6k (in Ontario). Your description suggests the broker would gross-up the RRSP withdrawal amount so that you always get what you requested. Are you certain this is the case? Somehow this seems counter-intuitive to me.

    “Anyone holding an RRSP account may convert a part, or all, of their RRSPs to a RRIF at any age.” I did not know this Daren. It is great to know. Do you happen to know what’s the min withdrawal % before 50 years old? Is is always 2.5%?

    “Be hesitant to convert your entire RRSP over to a RRIF before the age of 71. Doing so will limit your options to contribute to a tax advantaged account and reduces withdrawal flexibility.” How so? Say you have one RRSP and that you fully covert it to a RRIF. Can’t you simply open another (different) RRSP account and keep contributing to it? (given that you have available contribution room). I don’t get in which way my options to contribute to a tax advantaged account and my withdrawal flexibility are being limited/affected.

    Great post by the way. Thanks!

    1. Daren (Editor) says:

      Regarding the withdrawal it’s six to one person, a half dozen to another. Either way if you need $20,000 from your RRSP it’s going to show as a gross withdrawal of $28,571 or thereabouts.
      Mandatory minimum withdrawals under 71 years old are based on this calculation: Portfolio Value x [1/(90-age)]
      On the full conversion question, my point is not to rush into a full conversion to a RRIF thinking there are no downsides. It is generally better to do it in stages based on some math to calculate a tax efficient withdrawal scenario. That means retaining a RRSP alongside a RRIF before age 71. Having an active RRSP also makes it easy to contribute to an RRSP and get those tax deductions if for whatever reason you have a high income year, or allows you to throttle back minimum withdrawals if you are earning high income from another source during a particular year.

  2. Thanks.

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