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Mar 6, 2020

“To RRIF Or Not to RRIF –That Is The Question”!

by Tom Dusmet

Tom DusmetA 65-year-old Canadian MoneySaver reader asked how they should manage their Registered Retirement Savings Plan (RRSP) holdings to maximize tax savings and minimize eventual estate issues. Most of their investments were in registered accounts and they wanted to know if they should move some or all of the assets to non-registered accounts and Tax-Free Savings Accounts (TFSAs), and could they make those moves in kind (i.e. keeping their existing holdings intact) and what would be the tax implications of these actions? Also, their stated goal was to achieve this before the age-71 mandatory RRSP/ Registered Retirement Income Fund (RRIF) conversion (if possible).

First let’s dispel a broadly held–and inaccurate–belief, that somehow, life stops in the year you turn 71 (when you have to convert an RRSP into a RRIF)!

(HINT: NO, it does not)

Life, and most of your investments, can carry on as before, just under a different form of administration. In fact, you don’t have to wait until age 71 to open a RRIF and there can be advantages to starting one earlier. For example, maybe you have retired and want to transfer some, or all, of your RRSP assets to a RRIF when you turn 65, to set up regular withdrawals—and bonus—you can take advantage of the $2,000 pension income tax credit!

Next, letí’ lay out some of the key tax rules regarding RRSPs and RRIFs:

Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan. However, you will pay tax when you make withdrawals, or receive payments from the plan.

When you withdraw funds from an RRSP, your financial institution will withhold some tax. With RRIFs, however, if you plan to withdraw only the minimum amount, you have the option to have taxes withheld or not, and RRIF withdrawals are taxable on receipt. For larger RRIF withdrawals, the withholding rules are the same as for RRSPs.

The rates of withholding tax depend on your residency and the amount you withdraw. For residents of Canada, the rates are:

  • 10% (5% in Quebec) on amounts up to $5,000.
  • 20% (10% in Quebec) on amounts over $5,000 up to including $15,000.
  • 30% (15% in Quebec) on amounts over $15,000.

Important note: depending on what your total taxable income is, the standard tax withholding may not be enough to account for the tax you will owe at your marginal tax rate. If you want to avoid having to pay more tax when you file your tax return, you can request a higher withholding amount.

Once you open a RRIF, you must use it: although you don’t have to wait until age 71 to open a RRIF—and we highlighted some advantages to starting one earlier—a RRIF must pay income. It’s Canada Revenue Agency (CRA)’s way of making sure they get their taxes on your money!

Most institutions will allow you to transfer your investments “in kind” from an RRSP or RRIF to a non-registered account, to retain the existing securities, if desired. Also, if you had some unused room in your TFSA to take advantage of, you could anticipate that when you make an RRSP withdrawal to your non-registered account. TFSA contributions usually must come from non-registered accounts.

The real question the MoneySaver reader was asking was,

“OK ­— So, how much should I withdraw from my registered accounts early, so I will pay the least amount of tax over my lifetime?”

“Balanced is Best” is a good answer to that question. The answer will be different for each person, because “the devil is in the tax details”.

Obviously, the money is sheltered from taxes as long as it sits in an RRSP or RRIF, but then it will be taxed at the taxpayer’s full marginal tax rate when withdrawn. To be clear, there is no getting around this.

In contrast, non-registered money (on which all taxes are already paid) can be drawn on, tax-free (except for taxes on capital gains when you sell a profitable investment).

Conventional wisdom suggests that keeping money in RRSPs and RRIFs for longer usually offers the best tax sheltering advantages. But, if emptying the non-registered accounts first, then taking concentrated RRIF withdrawals later, caused spikes in taxable income, that was exactly what our reader was hoping to avoid: being forced to take higher incomes down the road, with commensurately higher tax rates, at a time in life when their spending needs may be slowing down!

To see what that potential tax spike might look like and what it will do to future income, we could project the value of the RRSPs, then apply mandated RRIF withdrawal rates them. Combining that with income from government pensions and other sources, and we’ll get a rough sense of what tax bracket our reader will land in.

Now, let’s say you are a senior who has seen your 65th birthday. You might want to consider rearranging your registered accounts and tap them for at least $7000/yr: you may be able to withdraw that money with little or no federal tax owing. (You may still be liable for some provincial tax). The reasoning is that for the first $19,892 of income, $6892 is the total of the eligible common tax credits, including the basic personal credit + the age credit for being 65-plus (which is income dependant) + the maximum pension income credit that a senior gets for having minimum $2,000 in income from a RRIF, registered annuity or employer pension.

By starting to take money from the registered accounts sooner, the idea is, that future payments should be a little lower, and, also, as an added benefit, you might avoid crossing over the clawback threshold for Old Age Security (OAS) in future.

The OAS clawback is something many affluent seniors love to keep an eye on: it applies to taxable incomes greater than $70,954. Above that threshold, seniors give up 15 cents of OAS for every additional dollar of income until OAS is reduced to zero. So, for our MoneySaver reader, who wanted optimum tax savings, staying just under $71,000, would help them collect their full OAS entitlement every year.

For another investor, who had less registered money, the conventional suggestion might make more sense, of deferring the RRSP conversion as long as possible.

Finally, coming back to TFSAs, this is the only real tax gift CRA gives us, apart from the RRSP, and not to take advantage of it is almost a sin: it is a great tool for seniors to use to stash away excess RRIF income!

So, suppose you had your government pensions, and your remaining RRIF (from which you took the required withdrawal, and subtracted the taxes + what you spent)… then flowed the remainder into the TFSA?

That would make for a nice, tax-free nest-egg for your favorite heirs!

Let’s summarize our Retirement Income strategy:

  1. Consolidate your registered accounts as you approach retirement to make things simple. Have a TFSA.
  2. Know how much income you want in retirement and then figure out where it’s going to come from: RRIF, Canada Pension Plan, OAS, etc.
  3. Map out your RRSP/RRIF withdrawal strategy for optimum tax efficiency.
  4. Plan for more conservative returns in your portfolios. Capital preservation should trump greed.


Tom Dusmet is a business writer and creator of Tom is passionate about providing factual, unbiassed information to Canadians to help them make better choices when investing their money.