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investor clinic

I am planning to retire and my wife and I will be converting our registered retirement savings plans (RRSPs) to registered retirement income funds (RRIFs). However, the mandatory RRIF withdrawals will exceed the current dividend flow from my stocks, so I will have to sell some shares regularly to create the required cash to withdraw. This will require paying close attention to know which shares and how many to sell at a given time. I will also incur trading costs. It's a little daunting to say the least. Any advice?

It might not be as complicated as you think.

If you don't need to spend your RRIF income, you don't necessarily have to sell anything in order to meet the minimum withdrawal requirement. Instead, you can transfer shares "in-kind" from your RRIF to a non-registered account. That way, you'll maintain ownership of the shares and avoiding trading costs.

Many RRIF holders are not aware of this option. In fact, several years ago, then finance minister Jim Flaherty wrote an open letter to financial institutions ensuring that all of them accommodate in-kind transfers at no cost to clients.

"A common misconception is that seniors must sell assets to satisfy RRIF withdrawal requirements," Mr. Flaherty said in the 2008 letter. "The income tax rules permit 'in-kind' asset transfers to meet the minimum withdrawal requirements – they do not require the sale of assets."

With an in-kind transfer, securities are priced at their fair market value. For example, if stock XYZ is trading at $50 and you transfer 100 shares out of your RRIF, your withdrawal would be valued at $5,000, and this amount would be added to your taxable income.

Keep in mind that the adjusted cost base (ACB) of these shares would also be $5,000 (or $50 per share), regardless of the price you paid when you originally purchased them in your RRIF (or RRSP). You need to know the ACB to calculate your capital gain when you ultimately sell your shares.

An in-kind transfer can satisfy all or part of the minimum withdrawal. If you also have cash in your RRIF, you can make a withdrawal such that the total amount transferred out, in shares and cash, equals the minimum RRIF withdrawal.

The minimum annual withdrawal rises with age. At 65, for example, it's 4 per cent of the RRIF's assets (based on the RRIF's value at the start of the year). At 75, it's 7.85 per cent. At 85, it's 10.33 per cent. And if you make it to 94 or older, you'll have to withdraw 20 per cent of the RRIF's assets every year. Withdrawals must start the year after you open your RRIF.

The good news is that, if your spouse is younger than you, you can use his or her age to determine your minimum RRIF withdrawal. Because income from a RRIF is taxable, it can be beneficial to keep RRIF withdrawals as low as possible – again, assuming you don't need the money for living expenses.

"The rule of thumb, if you don't need the cash, is to use your younger spouse's age, because you can always withdraw more if you need it," said John Waters, head of tax and estate planning at BMO Nesbitt Burns. If you want to use your spouse's age, you must elect to do so when you set up the RRIF, and the decision cannot be changed, he said.

What happens if your aggregate RRIF withdrawal exceeds the annual minimum? Tax will be withheld on the excess amount. Withholding rates are 10 per cent for amounts up to $5,000, 20 per cent for amounts from $5,001 to $15,000 and 30 per cent for amounts of more than $15,000. (Withholding rates are higher in Quebec). If you exceed the minimum withdrawal, you will need to have sufficient cash in your account to cover the withholding tax. Otherwise, you will have to sell some investments in order to pay the tax.

However, if you don't exceed the minimum, no tax will be withheld and you will therefore not need to have any cash in the RRIF for this purpose.

However, it's worth repeating that all RRIF payments – even minimum withdrawals – are included in your taxable income.

"So it will be important to consider these minimum amounts in determining your ultimate tax liability, and you should budget accordingly," Mr. Waters said.