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Converting your RRSP to a RRIF

Have you turned 71 this year, or will you do so by the end of the year? If you have an RRSP, federal income tax rules require you to convert it to a registered retirement income fund (RRIF) or to another income option such as an annuity. For the vast majority of RRSP holders, converting to a RRIF makes the most sense.

Here are the answers to the most frequently asked questions about this process.

What is a RRIF and how does it work?

A RRIF isn’t much different than an RRSP. You can hold the same investments you have in your RRSP, and they will continue to grow, tax-sheltered. The difference is that a RRIF is used to withdraw retirement income — you can no longer contribute new money. You can, however, transfer funds from another RRIF, and there are advantages to consolidating your RRIFs in this way. (See “Can I have multiple RRIF accounts?” below.)   

How much do I have to withdraw from my RRIF each year?

In the calendar year after you open a RRIF, you have to start withdrawing money from it. While the optimal amount for you depends on your goals and other sources of income, you must withdraw a minimum. These minimum amounts start at low levels and increase with age. For example, in the year after you turn 71, you must withdraw 5.28% of the market value of the assets that were in the RRIF on December 31 of the previous year. You can, however, always withdraw more than the minimum amount.

Note: Because of the pandemic and its impact on investment assets, the federal government reduced the mandatory withdrawal rates by 25% for 2020. These reduced rates are reverting to the regular withdrawal rates for 2021.

If you have a younger spouse or common-law partner, you can base the withdrawal schedule on his or her age, thereby reducing your minimum required withdrawal amount. If you’re turning 71 this year and your spouse is, for example, 64, you can choose this option when you set up your RRIF, effectively lowering the mandatory withdrawal amounts and reducing your taxable income. This is a beneficial strategy if you don’t need the extra income.

The optimal amount to withdraw from your RRIF depends on your circumstances, your retirement goals, and what other sources of income you have. As a physician, you may have used a professional corporation as well as RRSPs to save for your retirement. You may also have Canada Pension Plan and other pension income.

How are RRIF withdrawals taxed?

All RRIF withdrawals are considered income and must be reported on your personal tax return. If you withdraw more than the minimum required amount, based on your age, your financial institution will withhold some tax for you, so you don’t end up owing as much at tax time.

Can I convert my RRSP to a RRIF earlier than at age 71?

You can convert your RRSP to a RRIF as early as age 55. However, there are no benefits to converting earlier than you have to. Once you convert to a RRIF, you must make annual withdrawals: since withdrawals are taxable, it’s best to wait until you have to convert your RRSP.

How do I go about converting my RRSP to a RRIF?

The process is simple, but be sure to start well before the end of the year you turn 71 to avoid missing the deadline, which would lead to having your RRSP “deregistered.” That should definitely be avoided because it would cause serious tax issues!

The financial institution where you hold your RRSP should contact you about converting to a RRIF. You’ll have to fill out a RRIF application, choose a beneficiary or beneficiaries, and decide how much you want to withdraw. Naming a beneficiary will help minimize probate fees, in turn maximizing the amount transferred to your beneficiary.

Can I have multiple RRIF accounts?

You can have as many RRIF accounts as you like, but it means you’ll have to arrange for the minimum annual withdrawal from each one. You’ll also have to deal with all the institutions that hold your RRIFs. This means ensuring that each one understands your retirement and estate planning goals, your investment objectives, and how each withdrawal fits into your retirement plan. Remember, withdrawals from all sources are taxable, and withdrawing more than you mean to could result in paying more tax.

We recommend consolidating your RRSPs before it’s time to convert to RRIFs, ideally in your mid- to late 60s. This way, you’ll have all these assets together and can better monitor your asset allocation and performance. And working with a single institution — one that knows what retirement for a physician and their family is like — can help. At MD, we get it.

Who should I name as the beneficiary of my RRIF?

If you’re married or common-law, you should consider naming your spouse or partner as the beneficiary. On your death, the assets in the RRIF would “roll over” to your spouse/partner, with no tax to pay until he/she dies. And payments would continue to go to him/her seamlessly, minimizing estate administration costs.

What happens to my RRIF when I die?

The value of your RRIF at the date of your death is included in your income and taxed as such. So if you have $1 million in your RRIF, more than half could go to taxes.

There are three exceptions to this rule. The tax can be deferred if:

  • your spouse or common-law partner is the beneficiary (in this case, there can be a tax-free rollover);
  • you have a financially dependent child or grandchild under 18; or
  • you have a financially dependent, mentally or physically infirm child or grandchild of any age.

Planning for a secure, enjoyable retirement

It’s true, converting your RRSP to a RRIF is easy. But without the right financial advice, you could miss out on opportunities to increase your savings and reduce your taxes.

MD Advisors* can help you with your retirement income strategy. They know how to find the optimal mix of withdrawals from your RRIF and your corporation, as well as CPP, pension income, and any other income flowing into your household. They can plan for this in advance and keep you on track during retirement.

Talk to your MD Advisor to make sure your strategy protects your hard-earned savings, minimizes taxes and sufficiently funds your well-deserved retirement.

* 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.