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investor clinic

I recently retired and withdrew money from my registered retirement income fund. I was surprised that the bank withheld 30 per cent. Is this always the case?

No. With a RRIF, the government requires you to make a minimum withdrawal each year, starting the year after you open the RRIF. If you withdraw only the minimum, no tax is withheld. However, if you exceed the minimum, your financial institution will hold back a percentage of the excess amount and remit it to the government. The withholding tax 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 over $15,000. (Withholding tax rates are different in Quebec).

To be clear, the tax withheld is based on the amount of the withdrawal that is above the minimum, not on the entire withdrawal. However, the entire RRIF withdrawal is added to your income for the year. When you file your tax return, you may end up owing more tax – or getting a refund – depending on your total income from other sources.

There will be times when a RRIF holder needs to withdraw more than the minimum to pay for medical bills, home repairs or other expenses. But, generally, if you don’t need extra cash – and you want to avoid withholding taxes – withdrawing the minimum is the way to go. This will also keep more of your money growing inside the RRIF on a tax-deferred basis.

Minimum withdrawal percentages are based on your age (as of Jan. 1 of the year you make the withdrawal), and these percentages increase as you get older. To determine the dollar amount of the withdrawal, the percentage is applied to the value of your RRIF on Dec. 31 of the year before you make the withdrawal. For someone at the age of 65, for example, the minimum withdrawal is 4 per cent. This rises gradually each year, to 5 per cent by 70, 6.82 per cent at 80, 11.92 per cent at 90, and tops out at 20 per cent for RRIF holders 95 and older. If your spouse is younger, you can elect to use his or her age to determine your minimum withdrawal. This will reduce your taxable income and leave more money in your RRIF.

To avoid unexpected withholding taxes, you can instruct your financial institution to make only the minimum withdrawal each year. Your institution can calculate the appropriate dollar amount on your behalf and provide the cash in a lump sum or on a monthly, quarterly or semi-annual basis. If you don’t need the cash immediately, consider delaying the RRIF withdrawal until the end of the year to maximize tax-deferred growth inside the RRIF.

Can I avoid tax by making an in-kind RRIF withdrawal of shares and contributing them to my tax-free savings account?

To avoid having to sell investments and incur trading commissions, you can withdraw shares from your RRIF and deposit them in a non-registered account or TFSA. However, even if you contribute the shares to a TFSA, the fair market value of the shares at the time of the withdrawal will still be added to your income for the year. So, no, you can’t avoid tax on the RRIF withdrawal. What’s more, if the value of the shares exceeds the minimum RRIF withdrawal, you’ll face withholding tax.

How does pension income-splitting work with RRIFs?

As long as you are 65 or older, you can split up to 50 per cent of your RRIF income with a spouse to reduce your total taxes payable. What’s more, if your spouse is at least 65, he or she can use this income to claim the pension tax credit, which is applied on up to $2,000 of qualifying pension income.

Even if you don’t want to convert your entire registered retirement savings plan to a RRIF until the end of the year in which you turn 71 – which is the deadline for doing so – it may be advantageous to transfer a portion of the RRSP to a RRIF to take advantage of pension income-splitting and the pension tax credit as soon as you turn 65.

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