Advertisement
Do Canadians need to consolidate RRSP accounts before converting to RRIFs? Find out this and more.
My wife has an RRSP in her name and a spousal RRSP in her name, plus a small LIRA. She will be turning 71 next year.
My question is: Can she open a RRIF account and contribute both of her RRSPs plus the LIRA amount into one single RRIF account without incurring any taxable consequences?
—Steve
As you know, Steve, your wife must make some decisions about her registered accounts by the end of next year because of her age. It seems like a good time to consider consolidation of her accounts. In some cases, this is possible, but it’s not always. So, I will clarify the rules generally as well as how they may apply to her situation.
When you have a registered retirement savings plan (RRSP), you can only keep it open until December 31 of the year you turn 71. By that deadline, you must choose from these three options:
Cashing in RRSPs is not typically advised, unless the account amount is relatively small. Money withdrawn from an RRSP is considered income, so the entire account would be fully taxable if collapsed.
Annuities are coming back into vogue now, since interest rates have been rising the past few years. However, they are still a relatively unused registered account solution. When you buy an annuity, you hand over a lump sum of money in exchange for an ongoing payment from a life insurance company, and the income taxes are deferred until the annuity pays you in regular installments. So it’s like buying a pension.
Annuities can be a good option for Canadians without a pension, so that at least a portion of their retirement income guaranteed. Good candidates also include those with a low investment risk tolerance, or people in good health who expect to have a long life expectancy.
The last RRSP solution is the most common. Many Canadians convert their RRSP account to a RRIF account. A RRIF has minimum withdrawals that you need to take each year based on your age, and those rise over time. RRIF withdrawals are taxable income to the recipient.
You can consolidate your RRSPs when you convert them into a RRIF so that you have a single registered account. You can also consolidate your RRSPs long before you convert them to RRIFs. So, if you have multiple RRSP accounts, you could consider consolidating them at any time.
Consolidation has its benefits, including having a single RRSP account to monitor. It also leads to lower account administration fees and/or investment management fees.
A spousal RRSP is an account that one spouse owns but to which the other spouse contributes. The intention is to allow the use of the contributor’s RRSP room and the contributor claims tax deductions on the contributions. The withdrawals from the account become taxable to the other account holder.
There is a spousal attribution rule with spousal RRSPs that applies if you take withdrawals within three years of your spouse contributing. This may result in the withdrawals being taxed back to the contributor.
When you combine an RRSP and a spousal RRSP, whether you like it or not, the new account must be a spousal RRSP. As a result, you would typically transfer an RRSP into the existing spousal RRSP.
There are no tax differences between an RRSP and a spousal RRSP for withdrawals, other than the aforementioned attribution rules.
Even if you separate or divorce, your spousal RRSP cannot be converted to a personal RRSP.
As a result, Steve, your wife could combine her RRSP and her spousal RRSP by converting them both to a spousal RRIF. I would be inclined to do this.
Locked-in RRSPs have different withdrawal and consolidation rules than regular and spousal RRSPs. The locking-in provisions of your wife’s locked-in retirement account (LIRA) are meant to prevent large withdrawals. These funds would have come from a pension plan she previously belonged to. Pension money is treated differently from personal retirement savings, such that locked-in accounts have maximum withdrawals as well as minimum withdrawals.
In some provinces, an account holder may be able to unlock their locked-in account if the balance is below a certain threshold. This may apply for your wife, Steve, as you mentioned the account is small. Some provinces also allow a one-time unlocking of a portion of the account when you convert a LIRA to a life income fund (LIF), which is essentially a RRIF equivalent for a LIRA.
As a result, Steve, your wife may be able to get some or all of her LIRA account transferred to the same RRIF as her RRSP and spousal RRSP. If not, she will have to settle for having a RRIF and a LIF.
When you make transfers between registered accounts, they can typically be done on a tax-deferred basis as long as the transfers are made directly between accounts by the financial institution.
It is important to consider the timing of your account conversions, to consider unlocking locked-in accounts to consolidate with non-locked-in savings, and to plan for the future tax payable on your registered withdrawals.
Newsletter
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Practical advice on how to build your retirement savings for employees at mid-career, the self-employed, single parents and more.
The Trump effect and Trumponomics, Shopify’s huge earnings beat, it’s sunny days for Suncor shareholders and more.
Here’s how to get your free ticket to attend two MoneyShow virtual expos.
Should you be paid as a power of attorney? Learn about the compensation rules in Ontario and how to...
Here’s how Canada’s Old Age Security pension works, who’s eligible for OAS, when you can start receiving OAS, and...
Here’s how Canada’s retirement pension plan works, who’s eligible for CPP, when you can start receiving CPP, and CPP...
Apple and Nvidia vie for global market cap crown; Google, Microsoft and Meta crush earnings; Amazon’s Bezos takes WaPo...
Economy stalled in August, Q3 growth looks to fall short of Bank of Canada estimates.
While not guaranteed like an annuity, MyRetirementIncome is a flexible and simple financial product for those needing to convert...
Excellant article and one that would apply to many Canadians. Fits my situation perfectly.
Is it relatively a similar process to move a riff (as compared to an RRSP) account between institutions?
Jason
I have enjoyed and benefited from your many articles in Money Sense.
I was wondering if you would consider an article on the CHIP loans?
There seems to be a big push for these loans but I have not been able to find any of the negative considerations.
When I think of the benefits of compound interest to grow some investments, I think the loans are the same effect but in the opposite direction as it erodes ones equity.
Some examples with house values, loans at different levels and ages, the obligations and responsibilities of continuing to live in your CHIP house etc.
What happens if you can no longer live in your house because of health and the costs of getting out of the chip loan and the settlement of ones estate including the exception for taxes on ones principle residence.
Just a suggestion and I hope you might consider this topic
Thanks for all the great articles