7 things to consider when transferring your RRSP to a RRIF
Understanding the impact of when and how you withdraw from your RRIF will help you make the most of your retirement income.
CIBC Investor’s Edge
Aug. 05, 2021
4-minute read
When you’re getting ready to retire, one of your main priorities is to determine your retirement income stream.
Remember all of those years you contributed to your RRSP? Those savings can be converted to generate part of your retirement paycheque. One common option is to transfer your RRSP to a Registered Retirement Income Fund — or RRIF — by the end of the year in which you reach 71 years of age.
While transferring your RRSP to a RRIF is a relatively simple thing to do, understanding the impact of when and how to withdraw from your RRIF will help you make the best use of this important retirement income source.
Here are 7 things to keep in mind when you’re thinking of transferring your RRSP to a RRIF:
1. Know how much you’ll need
When planning your retirement and determining how your RRIF will fit into your overall income plan, it’s a good idea to create a retirement budget. Understanding your monthly living expenses, as well as any extra costs like travel, entertainment and family expenses, can help you determine how much you will need every month.
2. Estimate how much income you will have
The next step is to create your retirement paycheque by looking at all of your current and future sources of income. These may include Old Age Security, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), and income from an employer pension or from a business or part-time work, as well as your RRSP or RRIF.
3. Making RRIF withdrawals
Once you transfer your RRSP assets to a RRIF, you are required to make a minimum withdrawal every year, starting in the year after the RRIF is established. This minimum amount is based on the balance in your RRIF at the beginning of the year and your age, or you can choose to base it on the age of your spouse or common-law partner. You choose the age on which to calculate payments before the first payment is made from the RRIF — you cannot change it after that.
If you withdraw more than the minimum amount, tax will be withheld on amounts that exceed the required minimum withdrawal amount for the year. But remember that all amounts withdrawn from a RRIF are taxable, so you may need to pay additional taxes or you may get a refund when you file your tax return.
At CIBC Investor’s Edge you can schedule recurring RRIF payments to be withdrawn from your account. Make sure you have enough cash in your RRIF to cover any scheduled payments.
The easiest way to set up a scheduled or one-time RRIF payment at CIBC Investor’s Edge is by filling out the RRIF/LIF/RLIF Payment Change Request form in the RRSP and RRIF section of our Forms Centre.
If you find you won’t need to rely on your RRIF to cover the bulk of your retirement expenses, it may be a better option to withdraw only the minimum amount required, which may help maximize the amount of your other income-tested benefits and reduce your taxable income.
Keep in mind that the money you withdraw from your RRIF is considered income and is, therefore, taxable in the year you withdraw it. Your RRIF withdrawal will be added to your other sources of income to create your retirement paycheque. An increase in your retirement income may not only affect your taxes but could also result in a recovery or claw-back of certain income-tested government benefits, such as the Guaranteed Income Supplement or Old Age Security benefits.
To help reduce taxes, here are a few things you can consider:
Don’t take payments before you need them
Remember, once you transfer your RRSP to a RRIF, you must start withdrawing a minimum payment by the end of the year after you opened the RRIF. Withdraw only what you need. While it might be tempting to give yourself a bigger retirement paycheque, all of the income you receive is taxable. That extra income could put you in a higher tax bracket for the year you withdraw and reduce your tax deferral for future years.
Consider the benefits of tax-deferred growth
Your RRIF works like your RRSP in that the funds in your plan grow on a tax-deferred basis. The longer you keep them there, the more time they have to grow to meet your retirement needs.
Invest extra in a Tax-Free Savings Account (TFSA)
If your minimum withdrawal payment is more than you need, you may be able to deposit the extra into a TFSA, up to your annual contribution limit, which will help you continue to grow your savings and investments on a tax-free basis.
Base the minimum payments on the age of a younger spouse or partner
If your spouse or partner is younger than you, base the minimum payments on his or her age. This will lower your minimum payments.
Look into income-splitting strategies
If you are over 65, there may be income-splitting strategies you can use with your spouse or common-law partner to potentially reduce overall taxes for you both.
5. Understand the impact to your government benefits
The amount of retirement income you have could impact some of the income-tested benefits you are eligible to receive. Old Age Security, for example, can be impacted by the amount of income you earn over the year. If your income reaches a certain threshold, the amount of the benefit could be partly or completely reduced.
By keeping your RRIF payments as low as possible, you may be able to maximize amounts from these other sources. Get familiar with all of the income sources you’re eligible to receive at different stages of retirement. Being informed about what you’re entitled to and how to apply may help maximize the benefits you receive — and preserve more of your savings for your future.
6. Choose an appropriate investment mix
Your RRIF can hold a variety of different investments. It’s a good idea to hold a diversified portfolio within your plan to support your retirement income needs today, while balancing your needs for the next 20+ years. Diversify by asset class and choose both short- and long-term investments to balance regular, stable returns with long-term growth. Keep in mind, just because you’re retired, it doesn’t mean you’ve stopped investing.
7. Consider taxes that may arise upon your death
Name your spouse or common-law partner as the “successor annuitant” of your RRIF so that upon your death, they can take over as annuitant of the plan and continue to receive the payments. This move may allow the RRIF to bypass your estate, avoiding administrative fees and estate administration taxes including probate fees. In Quebec, your liquidator may have to agree that your spouse or common-law partner can become the successor annuitant.
