This is probably one of the most common questions I get.
In terms of current legislation your RRSP (Registered Retirement Savings Plan) has to be converted to a RRIF (Registered Retirement Income Fund) by Dec. 31 in the year that you turn 71. You are not forced to withdraw income in the first year but in the year that you turn 72 you must begin withdrawing income.
The amount of income that you must withdraw is based on two things. Firstly your age and secondly the amount of cash in your RRIF account as of Dec. 31 of the previous year.
Let me demonstrate this by way of an example. Let’s assume you turned 71 in 2009 and you converted your RRSP to a RRIF but were not required to take an income for that year. On Dec. 31, 2009 your RRIF account was worth $100,000. In 2010 you are now required to withdraw 7.48 per cent ($7,480). You can withdraw this money monthly, quarterly or annually but it has to be withdrawn in 2010. The minimum percentage amount that has to be withdrawn every year will rise with age, but remember that even though this percentage rises you could be withdrawing a lower dollar value if the account value has dropped.
The reason RRIF accounts are structured this way is because the government has graciously given you tax deferred growth on your RRSP and tax deductions on all your contributions during your working years and now they wish to begin recouping the unpaid tax.
That leads us to how RRIF income is taxed. All RRIF income is taxed as interest income regardless of type of investments held in the account, however there is no withholding tax on minimum withdrawals. Any withdrawals over and above your annual minimum will be subject to withholding tax at a rate of 10 per cent on $5,000, 20 per cent from $5,001 to $15,000 and 30 per cent above $15,000.
One of the challenges is the income that now has to be taken from their RRIF accounts pushes up their annual income to a point where they are getting clawed back on government benefits. To counter this, many retirees over the age of 65 split their RRIF income with their spouse as it forms part of eligible pension income. Another strategy is to use the age of the younger spouse to determine RRIF income, this is assuming you do not require this income or would like to lower it. There is also no maximum rule for a withdrawal from a RRIF except for the amount of money you have in the account.
Remember that you can convert a RRSP to a RRIF at any age if you need regular monthly income as most institutions do not allow systematic income withdrawals from a RRSP. Please remember to consult your advisor before taking any action.
Stuart Kirk, CIM, is a Retirement Planning Specialist with Precision Wealth Management Ltd. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd. For comments or questions Stuart can be reached at
stuart@precisionwealth.ca or 250-954-0247.
