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Retiring with RRIFs

It won’t be long before you have to convert your RRSP into a registered retirement income fund. What’s that you ask? We explain.

Everyone should be familiar with the Registered Retirement Savings Plan, but as you get closer to your post-working life, there’s another registered account you need to get to know: the Registered Retirement Income Fund. At 72, you’re no longer allowed to invest in an RRSP. In fact, you must – by government regulation – withdraw money from it. Essentially, an RRSP converts into a RRIF, which then becomes the account you remove your money from. For many retirees, the switch to a RRIF can be confusing. We turned to David Ablett, Director of Tax and Estate Planning at Investors Group, for his take on the benefits of a RRIF and what you need to know to make it work best for you.

Tip > 65 is the magical age While you have to convert your RRSP into a RRIF before January 1 of the year you turn 72, you can make that tran­sition at any age. However, many people wait until they are 65 to convert an RRSP to a RRIF, says Ablett. At that point, you can take advantage of the pension income tax credit and pension income splitting. That means that if you are required to take out, say, $10,000 from your RRIF in a given year, you could, if it were tax-advantageous, transfer half of it to your spouse’s income.

Tip > Know the “ins” and “outs” As with a RRSP, the money in your RRIF still grows tax-free, but you are no longer allowed to put new money in. You now have to make regular withdrawals at an increasing rate. There is a minimum amount you have to remove – see the chart below – but there is no maximum. However, you will have to pay tax, based on your marginal tax rate, on whatever you take out. Something else to consider: “If you take a lot out of your RRIF, you could now be exposing yourself to a clawback of your Old Age Security payments,” says Ablett.

Tip >Use your TFSA for extra cash If you are required to withdraw more money from your RRIF than you need, then take advantage of your tax-free savings account (TFSA). You’ll have to pay taxes on the amount that is withdrawn from your RRIF, but then the money can continue to grow tax-free in the TFSA.

December 14, 2015

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.