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Canadians must begin taking RRIF withdrawals the year after converting an RRSP. What happens if you convert only part of an RRSP, and which withdrawal strategy may be the most tax-efficient?
If I convert, say, 50% of my RRSP to RIF, is the mandatory withdrawal calculation based on the converted 50% or the total (unconverted) RRSP and converted RIF? Does Canada Revenue Agency inform me how much I need to withdraw every year from my RIF?
—Jackie
I come across a lot of people who have had registered retirement savings plan (RRSP) accounts for 40 years and are unclear on how the withdrawal process works. So, your inquiry, Jackie, is a good one.
I will address your questions and explain a bit more about the tax and procedural considerations with registered account conversion.
You can take an RRSP withdrawal whenever you want. The only exception is with a locked-in RRSP that comes from a pension plan. You may not be able to take withdrawals prior to age 55, except for extraordinary circumstances that vary based on the province of the pension the funds were transferred from.
RRSP withdrawals are taxable. There are exceptions for Home Buyer’s Plan (HBP) withdrawals for a first-time home buyer and Lifelong Learning Plan (LLP) withdrawals for post-secondary education.
You do not need to convert your RRSP to a registered retirement income fund (RRIF) to take a withdrawal. But unless you buy an annuity or cash in your entire RRSP account, you need to convert it to a RRIF by December 31 of the year you turn 71.
In your case, Jackie, it sounds like you’re considering a partial conversion prior to age 71. There may be tax reasons for you to do this.
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Like an RRSP, a RRIF withdrawal is fully taxable. A key difference is that a RRIF has minimum withdrawals beginning the year after you open the account, based on the value on December 31 of the previous year. There is a withdrawal percentage that increases as you get older, forcing you to draw down the account over time.
The minimum annual withdrawal from your RRIF has no required withholding tax. Some people confuse this with the withdrawal being tax-free, which is not the case. RRIF and RRSP withdrawals are both added to your tax return for the year.
There may be a couple tax advantages to withdrawing from a RRIF over an RRSP, though, and that may be your motivation, Jackie.
For one, you can split up to 50% of your eligible pension income with a spouse or common-law partner. This can reduce combined tax payable by moving income from your tax return to your spouse’s. RRSP withdrawals do not count, but RRIF withdrawals are eligible to split once you are 65.
Eligible pension income also qualifies for a federal pension income amount tax credit that reduces the tax payable on up to $2,000 of qualifying income. Provincial pension income amounts range from $1,000 to $2,000. So, a small amount of RRIF withdrawals may be tax free or close to it.
If you convert part of your RRSP to a RRIF, Jackie, only the converted portion is subject to the minimum annual withdrawal. The balance of your RRSP account is not.
If you have multiple RRIF accounts, the minimum withdrawals are calculated independently for each account.
Once again, the minimum withdrawal applies only the year after opening your RRIF. There’s no minimum withdrawal in the initial year.
Your financial institution is responsible for confirming your minimum withdrawal and making sure you take it each year. They should notify you early in the calendar year about the year-end value and the resulting minimum withdrawal based on your age.
The financial institution will generally give you the option to select the frequency of your withdrawals—such as annually, quarterly, monthly or otherwise—and whether you want optional income tax to be withheld.
As mentioned, there’s no required withholding tax on the minimum withdrawals. Amounts in excess of the minimum, should you take additional withdrawals, are subject to progressively higher withholding tax rates. But since the income is taxable, some RRIF account holders elect to have optional tax withheld in anticipation of the tax owing.
Many retirees end up owing tax each year, and after two years of owing more than $3,000 of tax ($1,800 for Quebec residents), the Canada Revenue Agency (CRA) will begin to request quarterly tax installments. These installments are prepayments of
expected tax owing based on your past two years of tax returns.
In summary, Jackie, you don’t have to convert your RRSP to a RRIF to take a withdrawal from the account. There may, however, be tax advantages to RRIF withdrawals over RRSP withdrawals.
You can convert part of your RRSP to a RRIF, and while there is a deadline of December 31 of the year that you turn 71 to convert your accounts, you can choose to convert some or all of your RRSP ahead of time.
Minimum withdrawals are based on each RRIF account you have, and any RRSP accounts you have at the same time are excluded from that calculation. Your financial institution will confirm your minimum withdrawal annually, and provide different withdrawal options to you.
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Can you discuss setting a minimum withholding tax on registered account withdraws as well as CPP an OAS so you can avoid owing tax at year end. Especially what you need to do to implement that.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Curious about Ontario lira and Federal lira unlocking and withdrawals, I would ideally like to aggregate retirement funds for hardship situation of not having a pension , tax efficiency, and simply reducing number of accounts
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Can’t you withdraw $2,000 from your RIFF per year tax free? That would be a good reason why you want to convert some of your RRSP into a RIFF before age 71 and withdraw that amount. Missed that fact in the article.
You missed to specify the min age when you can start a RRIF or take advantage of the 2000 credit when withdraw from RRIF account. Is 65, or 60? Why everybody is missing this?
My spouse passed at the end of October 2024. Am I allowed to split my RRIF income with my spouse for the 2024 tax year on my spouses final income tax filing?
Wanting to get out of any US investments in my RRSPs and LRSP and start with drawing on my investments now at 67. Any tips, tricks, advice?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.