Most working Canadians know the benefits of contributing to their Registered Retirement Savings Plan (RRSP), but many are less aware of the benefits of transferring their RRSP assets to a Registered Retirement Income Fund or RRIF.
It’s good to understand those benefits because, like it or not, your RRSP must be closed by the end of the year in which you turn 71. At that time, or at an earlier time of your choosing, one of three things must happen to the assets in your RRSP:
- You can take a lump-sum payout (less withholding taxes, and the payout must be included as income when you file your taxes)
- You can buy an annuity that will provide you with guaranteed regular income
- You can transfer the assets to a RRIF, which is similar to an RRSP, except that you cannot add new funds and you must make mandatory minimum withdrawals every year
These three options aren’t mutually exclusive: you could choose a combination of any of them.
The most popular option by far is a RRIF. This article highlights six key benefits of converting your RRSP to a RRIF.
- Savings grow tax-deferred
Just as in your RRSP, all the investments in your RRIF continue to grow on a tax-deferred basis. Withdrawals from your RRIF are treated as taxable income in the year received.
- Regular income stream, no withholding taxes on the minimum required withdrawal
While there is a minimum payment you must receive annually from your RRIF, there is no maximum amount. Withdrawals can include recurring automatic payments that you set up, and/or lump sum amounts, and those payments can be modified any time to meet your income needs. Unlike withdrawals from an RRSP, there are no withholding taxes deducted on your minimum RRIF withdrawals.
- The minimum required withdrawal can be based on your spouse’s age
Your minimum annual withdrawal amount is set as a percentage of the market value of your holdings, and the percentage increases each year based on your age. However, you can elect to set the withdrawal schedule to your spouse’s age. If your spouse is younger than you, this option lowers your annual required withdrawal.
- Pension income splitting with your spouse to reduce your tax bill
Up to 50% of an individual’s eligible pension income can be transferred (“split”) to their spouse or common-law partner, provided the transferring spouse is 65 years of age or older. RRIF income qualifies as eligible pension income. When a higher-earning spouse transfers pension income for tax purposes to their lower-earning partner, significant tax savings can result for the couple.
- Pension income credit of $2,000
Starting in the year you turn 65, you can claim a federal tax credit on your first $2,000 of eligible pension income, which includes your RRIF payments. This could result in hundreds of dollars of tax savings every year. If your income is low enough that you don’t need the entire credit to reduce your tax bill to zero, you can transfer the unused credit amount to your spouse or common-law partner.
- Your spouse can receive your RRIF tax-free
If you name your spouse as the beneficiary of your RRIF, the assets can be transferred tax-free to their RRSP or RRIF upon your passing. If you name your spouse a successor annuitant, they can take over your RRIF tax-free and start receiving RRIF payments. In both cases, your RRIF assets will not be part of your estate and will not be subject to probate fees.
If you have questions about RRIFs or want to create a plan for transitioning your RRSP assets let’s talk! 250-787-0365