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Make the most of your RRIF shift

Dale Jackson
Pay Day
Some Canadian currency.

We focus so much on saving it’s easy to forget there’s another side to a retirement plan: spending.

After decades of moving money into your savings, pulling it out can be like shifting from drive to reverse at 100 kilometres per hour. Suddenly you need to decide how you want to live and how you can afford to live. If you’ve been contributing to a registered retirement savings plan (RRSP) it begins with a registered retirement income fund (RRIF).

What is a RRIF?

Converting a RRSP to a RRIF is basically reversing the flow of money from in to out – from saving to spending. The process is usually carried out by the same financial institution that administered the RRSP.

Converting to a RRIF can be done at any time, but must be done no later than the year the plan holder turns 71. Once a RRIF is established, no more contributions can be made to the plan, and the plan can not be terminated except through death.

How to withdraw from a RRIF

The holdings in an RRSP generally remain the same when they are converted to RRIF and they remain under the same tax shelter until they are withdrawn. Like an RRSP the plan can be managed by a financial advisor (ideally, the same advisor) or self directed.

By the time you reach retirement your portfolio should have a significant amount of fixed income, such as bonds, to balance the portion of equities. This gives the holder of the RRIF the option of drawing from the fixed income portion and not feeling pressure to sell the equities immediately if the market is in a slump.

Minimum withdrawals

The year after a RRIF is established you must receive a yearly minimum payout based on the total amount in the fund and your age, or your spouse’s age. You can withdraw more but the excess amount can not be applied as part of the minimum for the next year.

The more you withdraw, the higher the tax rate. That’s why it’s important not to contribute too much to an RRSP. Even if you contribute a modest amount, returns made on the initial investment are also taxed when withdrawn, and good investors could become victims of their own success.

Also, if that amount is higher than $53,215, you could face a claw-back in Old Age Security (OAS) benefits.

Tax strategy

The whole point of an RRSP is to defer paying tax on income from a time when you are in a high tax bracket to a time when you are in a low tax bracket.

So, when withdrawing funds from a RRIF the name of the game is to keep as much as possible in the lowest tax brackets. One way to do that is by splitting income with a lower income spouse. You can do that by contributing to a spousal RRSP during your working years and try to keep the amounts in each RRSP as even as possible.

When it comes time to make withdrawals each spouse can claim an equal amount regardless of whose RRIF it comes from. If, for example, one spouse must withdraw $60,000 and another must withdraw $40,000, each can claim $50,000.

In addition, topping up your tax free savings account (TFSA) during your working years will provide tax-free income in retirement and decrease your reliance on a RRIF.

Money from the sale of a principal residence, a secured line of credit or a reverse mortgage can also provide tax-free income.

There are many other options with registered retirement income funds depending on individual circumstances so it’s best to speak with a qualified professional.