Understanding your RRIF

Question

The time has come for me to convert my RRSP to a RRIF and I have a few questions. Is there any way I can receive the same tax refund without contributing money to an RRSP? Is there any way of withdrawing from a RRIF effectively tax-free? And finally, can I convert income in my RRIF into capital gains through T-series & corporate class?

Answer

Congratulations. You’re 71-years-old and have hit the magic milestone when the retirement savings plan you’ve been squirreling money into for years becomes a retirement income fund. It is a bit of a new game and you’re smart to ask some questions. I’ve asked Jason Heath, a certified financial planner with fee-only firm Objective Financial Partners, to give his two-cents on each of them.

RRIFs and refunds

Is there any way I can receive the same tax refund without contributing money to an RRSP?

Brace yourself for it. RRIF withdrawals are fully taxable. If you just take the minimum withdrawal your investment firm likely won’t withhold anything to pay the tax, but you’ll still have to fork over the money when you file your taxes each year. Furthermore, says Heath, “if someone owes more than $3,000 of tax in two consecutive years, the government could start asking them to pay quarterly income tax installments to prepay their tax owing for the year in advance.” There is a partial offset for the first $2,000 for the pension income amount, but that will be small consolation.

There is one other option that may allow you to contribute to an RRSP. If you have contribution room generated by earned income and your spouse is 71 or younger you may be able to continue contributing to your spouse’s RRSP, says Heath.

Flow-through shares

Is there any way of withdrawing from a RRIF effectively tax-free?

Yes. There are options. But some of them carry more risk than you might want to take, because you may not be able to guarantee capital preservation. As an example, Heath points to the RRIF or RRSP meltdown strategy using flow-through shares. “These are special junior mining or oil and gas investments that generate nearly 100% tax deductions and have a number of other tax implications, he says. “But I don’t think it’s an advisable strategy for most retirees.”

This is an area where I would definitely recommend you consult a tax accountant or financial adviser with a lot of tax experience. You don’t want to get into something that provides tax relief in the short term, but stress in the long term.

Income alchemy

Can I convert income into capital gains through T-series and corporate class funds?

You can do this with other income, but not with your RRIF withdrawals. As Heath explains, T-series and corporate class mutual fund structures are used to convert certain types of investment income into other types of investment income. “They’re typically used for non-RRSP, non-RRIF investments that are generating taxable investment income,” he explains.

I’m sure these are not the answers you wanted to hear. But at least you are asking the questions.

What is an RRSP?

How much should I contribute?

Where to invest my RRSP?

Need more help?

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.