The do-it-yourself investors of the baby boomer generation will retire in droves over the years ahead. A critical milestone in their journey will be the conversion of their registered retirement savings plans into registered retirement income funds.
This Portfolio Strategy RRIF Guide is designed to help with the mechanics of this shift away from accumulating retirement savings and into drawing upon this money. The guide looks at questions such as how, exactly, the conversion is done and how to set up income payments from your RRIF.
For practical examples, we'll look at how a pair of online brokerages handle RRIFs. One is TD Direct Investing, a bank-owned firm, and the other is Questrade, an independent.
An RRSP must be converted to a RRIF by the end of the calendar year in which you turn 71.
How to make the switch
TD Direct clients must visit a TD Canada Trust branch to convert an RRSP to a RRIF, says Albert Carwana, a senior manager at TD Direct. Once the RRIF account is set up, you'll need to call TD to initiate the transfer of your RRSP account holdings. The process takes about 24 hours.
At Questrade, which has no branch network, representatives will contact clients during the spring of the year they turn 71 and help them with paperwork to convert an RRSP to a RRIF. If no action is taken by clients by Dec. 1, the RRSP is automatically converted.
Is there a case for converting an RRSP to a RRIF before the age of 71?
Daryl Diamond, a Winnipeg-based certified financial planner (CFP) and author of Your Retirement Income Blueprint, lists two reasons:
The convenience of having regularly scheduled withdrawals from a RRIF instead of having to make periodic lump-sum RRSP withdrawals (expect fees and withholding taxes to apply to RRSP withdrawals).
From the age of 65 on, RRIF payments are considered eligible pension income, while RRSP withdrawals are not. This means RRIF payments qualify for the pension income tax credit and pension income splitting, where up to 50 per cent of RRIF income is split with a spouse for tax purposes.
Withdrawing money from a RRIF
You have to start taking money out of your RRIF annually starting in the year after you set it up. So if you convert an RRSP into a RRIF in 2017, you don't have to start withdrawals until 2018.
Federal government regulations require a minimum withdrawal from a RRIF each year. The minimum is calculated using a formula for people aged 70 and younger – just multiply the value of your RRIF at the start of the year by 1/(90 minus current age). Once you're 71 and older, you must follow a schedule that starts at 5.28 per cent of your RRIF value at the beginning of the year and rises to 20 per cent for those aged 95 and older.
If you ask to withdraw the minimum, your broker will calculate the dollar amount for you. You can choose to have the withdrawals pegged to the age of a younger spouse if you would like to slow down the process of drawing on your RRIF assets to preserve them as long as possible. TD says no official proof is required to verify your younger spouse's age – a verbal confirmation will do.
RRIF account application forms typically ask clients whether they want to withdraw the minimum or more than that, and whether they would like the money monthly, quarterly, semi-annually or annually. "Some people don't need the money, so they leave it in the RRIF until the end of the year," Mr. Carwana said. "Other people need the cash flow, so they take the money out monthly and treat the money like a pension cheque."
The application forms at TD and Questrade allow clients to specify where they want their RRIF withdrawals to go – options include the money being sent as a cheque, deposited electronically to a chequing account or moved to another investing account. You can also have money transferred to a tax-free savings account, which makes sense if you do not need the money you're withdrawing from a RRIF to cover living costs.
Prefer not to tie yourself down to prescheduled RRIF withdrawals? Your broker may, as TD does, have a default that will automatically cover off your annual minimum amount by having it withdrawn at the end of the year.
Want to make changes to your RRIF withdrawals? Questrade is typical in asking for a letter of direction with the date, the client's name, account number and signature, with clear instructions.
What if I don't have cash in my RRIF account to cover a scheduled withdrawal?
The withdrawal will be made and the client notified so that he or she can sell a security to cover the balance required. No interest is charged on a debit in a RRIF, but brokers will sell investments as required if a client doesn't take action. The sale will typically be done on an investment savings account or money market fund if possible.
All about the in-kind withdrawal
This is where you withdraw some shares of a stock or mutual fund instead of cash. Mr. Carwana said you would have to call TD and specify where you wanted the securities to go. The amount of the withdrawal would be the cash value of the securities being transferred.
RRIF account fees
Questrade has no admin fees or charges for RRIF withdrawals. TD is typical of many online brokers in charging a $25 per quarter maintenance fee for household accounts with total assets of less than $15,000. The fee can be avoided if you make three or more trades in the preceding quarter where commissions are paid. There is no charge for withdrawals from a RRIF.
A word about taxes …
If you make the minimum RRIF withdrawal, the amount will be added to your income for the year and taxed accordingly. "People have to be careful to make sure they have the money to pay whatever taxes may be owed at tax time," Mr. Carwana said.
For withdrawals above the required minimum, a withholding tax will be applied at a rate of 10 per cent for amounts up to $5,000, 20 per cent between $5,000 and $15,000 and 30 per cent for amounts above $15,000. Additional income tax may apply, depending on your personal situation.
… and the dreaded Old Age Security clawback
A clawback of OAS benefits – technically known as the OAS recovery tax – started kicking in for the 2016 income year with income of $73,756. RRIF withdrawals will be a factor in determining your income. OAS would be fully clawed back with income in the mid-$119,000 range.
"Anything you can put in your RRSP, you can put in your RRIF," Mr. Carwana said.
Holding U.S. dollars in a RRIF
Questrade is one of a growing number of brokers that offers this feature, while TD Direct says it will add it late in 2017.
What about annuities instead of a RRIF?
RRSP holders have the choice of moving their money into a RRIF or an annuity. Annuities are an insurance product that converts a lump sum of money into a flow of income for as long as you live. Annuities are sold by insurance companies and agents, not the typical investment dealer.