Converting an RRSP to an RRIF

a stack of gold coins that represents converting RRSP to RRIF

Converting an RRSP to an RRIF

You’ve been saving money for years in your registered retirement savings plan (RRSP) and now it’s time to cash in.

You could take out all the money at once if you wanted, but it’s a better idea to convert the RRSP to a registered retirement investment fund (RRIF).

The RRIF will continue to grow any investment income tax-free, but you’ll be withdrawing from the account instead of contributing to it.

You can convert your RRSP to an RRIF whenever you want.

However, if you reach the age of 71 in 2019 and still have funds in your RRSP, the federal government requires you to close your account before December 31, 2019.

You can still make a deposit to your RRSP in 2019 up to your maximum contribution room to take advantage of the tax benefit.

You also have a lifetime over-contribution limit of $2,000 that you can contribute to your RRSP.

You won’t be able to take the tax benefit for the $2,000, but if you have a high-yield investment in your portfolio, the capital appreciation, interest and/or dividends will accumulate tax-free until you collapse the account.

Be careful not to go over $2,000 since you’ll have to pay a tax of 1% per month on excess contributions.

What happens if I don’t collapse my RRSP?

If you don’t transfer your RRSP to another registered plan, like an annuity or registered retirement income fund (RRIF) before then, the CRA will treat your entire RRSP savings as income in 2019.

The tax hit could be substantial. So, you’ll want to search out the best way to collapse your RRSP so you can minimize your tax bill.

You can keep your new RRIF in the same financial institution you held the RRSP, with the same investments.

If you have multiple RRSPs, you can put them into one RRIF or have multiple RRIF acounts. You'll have to open a RRIF account and choose a beneficiary.

When do I start withdrawing from my RRIF?

You must start taking withdrawals the year following the year you opened your RRIF.

Like the RRSP, you won’t pay taxes on any money that stays in the account - only when you withdraw the money.

Some years you might want to withdraw more money depending on your expenses, and some years you may want to withdraw less.

There is a mandatory minimum amount you’ll have to withdraw each year based on a % of your account balance at the beginning of the tax year, and this % increases as you get older.

Register RRIF with your younger spouse to reduce your tax liability

There is a way you could reduce your tax liability in the early years of withdrawals from a RRIF.

If you have other retirement income and can live on reduced withdrawals from your RRIF, you can register the RRIF with the CRA based on the age of your spouse if he/she is younger.

For example, if you’re 71 and your spouse is 64, by registering the RRIF on your spouse’s age, the RRIF withdrawals will be divided into 7 additional years and therefore lower payments.

You’ll be reducing the annual minimum you’re required to withdraw from your RRIF thereby conserving capital and allowing the RRIF to grow.

Another option is to use part of your RRSP funds to set up a small RRIF at age 65 to take advantage of tax credits that relate to the first $2,000 of qualifying pension income.

By transferring $14,000 from your RRSP to a RRIF at age 65 and then withdrawing $2,000 per year from 65 to 71, you’re taking that $14,000 tax-free if you are in the lowest tax bracket in 2019.

If you have a higher marginal tax rate, there will be a tax cost but not as high as it would otherwise be.

Transfer $14,000 from RRSP to a RRIF at age 65

Age  65 66 67 68 69 70 71
Withdrawal $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000

Pension income splitting allows you to double the RRIF withdrawal to $4,000 per year subject to certain conditions.

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