Blog

By: Brian Adams, CLU, CH.F.C

You have worked hard all your life and have been saving for retirement.  That day has finally come, you are ready to retire, and you wonder, what do you do now?  What is the next step? This is probably one of the most asked questions we get as financial advisors.

It is quite simple really! You are just exchanging one investment product for another. One is an accumulation product and the other is an income product. The important thing to remember is that there are different rules governing pension proceeds and not all pension plans allow conversion to a personal income plan.

So why go to all this trouble? Why not just take an annuity from your pension? What is important to remember is that although a pension annuity provides you with a lifetime income, unless it is significantly indexed like a federal government plan, it has some disadvantages. First, it means in most cases that your spouse will only receive 60% of your retirement income at your death. Further, your retirement proceeds cannot pass on to your children or another beneficiary. They simply go back in the pot as it were. Also, you will have no say in how your retirement income is invested and you will not be able to vary the amount of income you receive.

So, what it boils down to is how much control do you want to have over your money?

You can convert your pension money into two different products. Any voluntary contributions that you have made to your pension plan can just be converted into a RRIF just like your RRSP. However, any contributions made by your employer are what we call locked-in. This means that they are governed by those pension rules I mention earlier.

As a result, this money must either go into an annuity or a life income fund (LIF). A LIF works like a RRIF, except that there are minimums and maximums that must be paid out based on age. You can also split this money and have some of it in an annuity and some of it in a LIF.

Before the money goes into a LIF however, it must first be converted into a locked-in retirement account (LIRA). This satisfies the pension rules governing locking-in of pension money. The good news is you also have the option (in Ontario) to unlock up to 50% of that locked pension money and put it into a RRSP or RRIF with no limitations as to income flow!

One of the other considerations is making sure that we can offer the same or greater income from these proceeds. Since most pension plans are invested so conservatively, we can usually meet or beat the income they provide. Most times we can do this with a very low risk investment of the proceeds.

So, you could have retirement income coming from a RRIF, a LIF, and an Annuity. Along with indexed income from your government CPP and OAS programs.

Now go out there and enjoy your retirement!

For more information, click HERE.

If you have been a good saver and contributed religiously to your RRSP, you should be rewarded with a sizeable six or seven figure RRSP that would make your retirement that much more enjoyable. The only issue now is – how do you get the money out of the RRSP without paying more tax than you should? Typically, it is advised that investors leave their RRSPs alone for as long as possible to take advantage of the tax-free growth. While this can be true for many people, it is important to crunch the numbers before you retire to make sure this makes the most sense for your unique retirement situation. Many retirees, especially those with a high net worth, may find there could be a more efficient way to withdraw retirement income.

What You Need to Know

The intended use of a RRSP is to defer taxes from the time you are in a high tax bracket until you get into a lower tax bracket, thereby saving some tax on your contributions and allowing the money to grow tax free for many years. At some point, however, you must take that money out. The government mandates that Canadians must convert their RRSP to a RRIF, or an annuity, at age 71. The government also mandates that a minimum amount be taken. The issue with waiting until you are required to convert to a RRIF and take income is that you have little flexibility as to what you can withdraw. If your RRSP is large, the mandatory withdrawal amount may push you into higher tax brackets

Let us look at an example of how this could play out. In this situation below, the retiree has waited until age 71 to start drawing down their RRSP:

Joe has a RRIF worth $600,000 and his minimum withdrawal at age 71 will be $31,680 (5.28% x $600,000 = $31,680) for the year. He receives the maximum CPP benefit of $14,445 annually and an OAS benefit of $7380. These three income sources alone will total $53,505. The lowest tax bracket for the year 2021 is $49,020. This means Joe has been pushed into a higher tax bracket! This is before the income from his rental properties, defined benefit pension plan, and income from his non-registered investments are calculated.

As you can see from the example above, waiting until the last minute to start taking an income from your registered investments can have unintended consequences. Aside from simply paying higher taxes, there are income tax implications that need to be considered as you move to higher tax brackets as well. At age 65, you gain two tax advantages: the Age Amount non-refundable credit ($7635 for 2021) and the Pension Income credit ($2000 for 2021). The Age Amounts is income-tested and it reduces by 15% of the amount your net income exceeds $38,893 for 2021. This claw back also applies to your OAS, which begins if your income exceeds $79,054. Both credits could be affected by RRIF minimums that become mandatory at age 71, therefore:

1. Pushing you into a higher tax bracket
2. Cause a partial or total loss of your Age Amount tax credit
3. Cause a partial or total claw back of your OAS income

And since the minimum withdrawal rate gets larger as you get older, this issue will only worsen as you age.

Here are some strategies that could help you pay lower taxes on your RRSP withdrawals:

1. Consider deferring your CPP and OAS. Both Canadian pensions allow you to defer until age 70 to start receiving them, and you get rewarded for the deferral by receiving higher amounts. You can then use RRSP withdrawals to fill the income gap that the CPP and OAS would have provided, so you can draw down your RRSP at a lower tax bracket.
2. When you stop working, you normally fall into a lower tax bracket, so top up your income to your existing tax bracket with RRSP withdrawals.
3. Start a RRIF at age 65 to take advantage of $2,000 pension income credit. No matter how much income you have. This pension credit will allow you to withdraw $2,000 tax free from your RRIF, if you do not have any other pension income. So, fund the RRIF with your RRSP money to take $2,000 out tax-free each year.
4. If your spouse’s RRSP value does not equal yours, you can start to equalize the amounts by withdrawing from yours to put into a spousal RRSP, if you have contribution room. The tax on your withdrawal is eliminated by your equivalent contribution into the spousal RRSP.

The Bottom Line

Always take to a financial advisor before starting RRIF payments. There is no one-size-fits-all when it comes to planning for retirement income. Everyone must consider their own financial situation when deciding how and when to start taking an income from your RRSP. Some things to talk to your advisor about: a) the amount of your minimum RRIF withdrawals at 71 b) how secondary income (rental income, side business etc.) will affect your tax bracket c) the best time for you to start OAS and CPP. It is important to ensure all your income sources are working as tax efficiently as possible so that you can get the most out of your hard-earned retirement savings!

Book an Appointment with us to discuss your RRSP – click HERE

If you are nearing retirement, you may be starting to think about creating retirement income for yourself from your RRSPs. Registered Retirement Savings Plans (RRSPs) are considered accumulation vehicles.  This means they are used to save for your retirement in a tax efficient way. When the time comes to start using your hard-earned savings to fund your retirement, you may want to consider moving them to a payout vehicle called a Registered Retirement Income Fund (RRIF).

Much like an RRSP, a RRIF is a tax deferred account that allows your investments to grow without immediate tax implications. The purpose of a RRIF is to distribute your savings to you in your retirement years while still allowing your money to grow tax deferred.

What You Need to Know

When to Convert Your RRSP to a RRIF

You can convert your RRSP to a RRIF at any time, but you must do so by the end of the year that you turn 71. This conversion must be done regardless of whether you need income. Once you convert your RRSP to a RRIF you must start taking scheduled income.

If you are under 71 and do not require a steady stream of income, it is often beneficial to keep the funds in an RRSP. This way you can still take money out, if necessary, but the account can continue to grow without being drawn down on a regular basis.

How to Convert Your RRSP to a RRIF

It is important to convert your RRSP directly a RRIF to avoid unnecessary taxation. The process is simple but should be done with the guidance of a financial advisor to ensure the conversion is done correctly and in a timely manner.

Step 1: Fill Out a RRIF Application – Converting a RRSP to RRIF will require that you open a new account. Your advisor will prepare the paperwork for you.

Step 2: Name Beneficiaries – Registered accounts allow investors to name a beneficiary. Beneficiary designations allow money to be passed quickly and directly to a spouse or qualified dependent in the event of your death. Spouses and qualified dependents are eligible to receive the proceeds tax free. You can leave the money to anyone you wish; but they will be taxed on the amount received.

Step 3: Determine a Withdrawal Schedule – There are several considerations when withdrawing from your RRIF:

• Payments from a RRIF must begin the year after your 71st birthday.
• All payments are considered taxable income in the year they are received.
• RRIFs are subject to minimum withdrawal requirements and a certain percentage must be withdrawn each year. The percentage that must be withdrawn increases as you age. There are no maximum withdrawal amounts.
• You can choose to receive payments monthly, quarterly, semi-annually, or annually.
• You can elect use your spouse’s age to calculate the minimum withdrawal. This can allow you to keep the funds in the account longer and retain their tax deferred status.
• Any withdrawals over the minimum amount are subject to withholding tax.

The Bottom Line

It is important to pay close attention to the timing of converting your RRSP to a RRIF. If the RRIF is not established by the end of the year in which you turn 71, the account will be deregistered and all the funds in the account will become taxable income to you in that year. Plan well in advance to ensure you keep the registered status of your investments!

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