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RRIF strategies to optimize your taxable income in retirement

Mature couple chopping vegetables and cooking together in the kitchen.

Deciding when to convert your RRSP to a registered retirement income fund (RRIF) is an important step in making your retirement plan. A personalized, tax-efficient withdrawal strategy can help you minimize tax and make the most of your savings – whether you need them now or later.

A quick refresher: What is a RRIF?

While an RRSP helps you save for retirement through annual contributions, a RRIF helps fund your retirement through annual withdrawals. You can convert your RRSP to a RRIF at any time before the end of the year in which you turn 71. You’re required to start drawing RRIF income by the end of the calendar year in which you turn 72.

Once you have converted, you must take at least the minimum withdrawal amount from your RRIF yearly; this is calculated as a percentage of the plan’s total value at the beginning of the year. The percentage increases as you age, so your minimum withdrawal amount will too.

Any amount you withdraw over the minimum is subject to withholding taxes:

 

Quebec

Rest of Canada

Up to $5,000

5%

10%

$5,000 to $15,000

10%

20%

Over $15,000

15%

30%

Taking funds out too early or withdrawing more than you need could put you in a higher tax bracket, or affect your eligibility for income-tested government benefits. So it’s important to withdraw strategically.

Before you convert

If you have multiple RRSP accounts, you will make your life easier by consolidating them with one financial institution. Consolidation makes administering your accounts simpler, and also makes it easier to keep track of how your money is allocated among different investments.

Tax-efficient conversion and withdrawal

Draw income from your least tax-efficient sources first

For maximum tax deferral benefits, you want to withdraw as little as possible from your RRIF for as long as possible. Your least tax-efficient sources, such as personal investment portfolios, should be drawn down first. See How to withdraw funds tax-efficiently in retirement.

Withdrawing only the mandatory minimum amount from your RRIF allows your funds the opportunity to increase in value. A tax professional, in collaboration with your financial advisor, can help you structure your withdrawals tax efficiently in a manner that is consistent with your primary objectives.

Use your spouse’s age to calculate the minimum amount

If your spouse or common-law partner is younger than you, you have the option of calculating the minimum RRIF withdrawal according to their age rather than your own when you begin the process to convert your RRSP to RRIF. This can be a good strategy if you don’t need RRIF income immediately. You'll need to inform your financial institution if this is the route you wish to take. Bear in mind, though, that you can’t change your mind later.

Choose a withdrawal schedule that works for you

You can choose to take a lump sum each year, but it’s not the only option: you can choose any schedule that works for you – weekly, monthly, quarterly or yearly. Set up automatic withdrawals at the intervals that work best for you. Don’t worry about calculating the RRIF minimum withdrawal amount each year – your financial institution will do that for you.

If you want to give your RRIF the potential to grow throughout the year, it’s best to withdraw a lump sum at the end of the year.

Contribute the extra funds to your TFSA

If you don’t need the money from your mandatory RRIF withdrawal, and have contribution room, deposit the funds in your tax-free savings account (TFSA).

Inside the TFSA they will grow tax-free, and all withdrawals are tax-free. What’s more, withdrawals from your TFSA won’t affect your eligibility for income-tested benefits such as Old Age Security or Guaranteed Income Supplement.

Average out your income in retirement

Putting off withdrawals isn't always the answer: if you have a large RRSP your tax liability on the withdrawals will be significant. By converting to an RRIF and withdrawing your income earlier, you will spread out the amount of tax you pay.

Pension split with your spouse

Income splitting allows a higher-income family member to transfer income to a lower-income family member, reducing the overall tax paid by a family. If you’re 65 or older you can split up to 50% of your RRIF income with your partner or spouse to reduce the total taxes payable on the amount.

If they are at least 65, they can use this income to claim the pension income tax credit. It applies to the first $2,000 of eligible pension income, which translates into a maximum federal annual tax savings of $300.

A little pre-planning goes a long way

Even if you don’t need your RRIF income immediately, it’s important to plan ahead and maximize your withdrawals so you don’t pay more tax than you need to. Talk to your MD Advisor* to determine the RRIF withdrawal strategy that’s right for you.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.