Although some of Canada Revenue Agency’s withdrawal rules regarding Registered Retirement Income Funds are quite clear, not all the options available to the retiree are well-known.
We know that in the year we turn 71 we must contact the financial institution holding our RRSP and sign a document which converts our RRSP to a RRIF. Nothing changes with respect to the investments held — it’s just a name change — we don’t even need to begin drawing funds from the RRIF until the year following.
In the calendar year that we reach age 72, we must begin drawing a minimum percentage of the previous December 31 RRIF value. At this age, the minimum is set at 7.48 per cent of the RRIF value.
However, an alternative is available for those whose spouse is younger. In that case, the older spouse may elect to use the age of the younger partner to determine the minimum draw required. For example, if the younger partner is 65, the minimum draw required would be reduced to 4.0 per cent.
Taking advantage of the reduced draw can be particularly helpful to those who, having reached 72, are well enough off financially to not need the 7.48 per cent specified for their age. They can reduce the draw, based on their younger spouse’s age, and leave a higher balance in their RRIF account, letting it continue to grow and compound tax-free for a longer period. Each year, of course, they will need to increase the percentage draw slightly, in line with that dictated by the spouse’s age.
Draws from RRIF accounts are not limited to only the minimums specified. The retiree may exceed the minimum draw by any amount — however, taxes on the total withdrawal will be payable at the RRIF holder’s full marginal tax rate.
A retiree need not wait until age 71 to convert to a RRIF, and to age 72 before commencing draws.
An RRSP can be converted to a RRIF any time after age 55, as long as draws commence no later than the following calendar year. The minimum percentage draw will be set in accordance with the RRIF holder’s age the year the draw first occurs.
A retiree may wish to start draws well before age 72 if, for example, the funds are required to maintain a desired lifestyle; or, perhaps the RRSP is so large that if allowed to grow to the holder’s age 72 without draws, it would then trigger a claw-back of some, or all, of the OAS benefit. OAS claw-back begins if an individual’s taxable income exceeds approximately $71,000 in any given year; the full benefit of OAS is lost at taxable incomes over $116,000.
Once draws from a RRIF commence, the account holder can choose how the funds are withdrawn. They can be taken monthly, quarterly, or in a lump-sum once a year — as long as the total drawn meets or exceeds the specified minimum amount.
A retiree may not need the cash on a monthly basis; he/she can instead opt to wait until December to withdraw the total annual amount.
This allows the funds to remain invested for almost the entire year, before withdrawal of the payment.
There are those who choose to top-up their annual $5,500 TFSA eligibility each January, by drawing the RRIF funds in December, and in the next month, adding some or all of those funds to their TFSA.
Others plan to use the December lump sum RRIF draw as their vacation fund for the following year. Whatever the reason, it is important to be aware that this option exists for all RRIF holders.
One last consideration to keep in mind: A couple will normally designate one another as the beneficiary on a RRIF account. When one dies, the deceased’s RRIF balance is added to that of the survivor, with no tax consequences. However, when the survivor dies, the full balance remaining in the RRIF account is added to that individual’s income in his/her final year, and is taxed fully. It is therefore important that retirees set their annual RRIF draws at a high enough level that their eventual estate is not likely to be left with a huge, fully-taxable RRIF balance.
Every retiree has different needs. How to manage a RRIF, and the withdrawals from it, will vary with each individual. However, it is important to be aware of all the options which are available.
If necessary, ask a family member, a good friend, or your accountant, to help you determine your best approach before you too, must begin draws from your RRIF account.
A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his recent Second Edition of The SMART CANADIAN WEALTH-BUILDER.
Contact Panorama Rec Centre to register for Peter’s Elder College Fall session – Financial & Investment Planning for Retirees & Near-Retirees (Thursdays, September 18 to October 16).
