When you’re getting ready to retire, one of your main priorities is to determine how you’re going to pay for your retirement and to build your retirement income. Remember all of those years of contributing to your RRSP? Those savings can be converted to generate part of your retirement paycheque, in the form of a Registered Retirement Income Fund — or RRIF.
While transferring your RRSP to a RRIF is a relatively simple thing to do, understanding the impact of when and how to withdraw from your RRIF will help you make the best use of this important retirement income source.
Here are 5 things you need to keep in mind when thinking of transferring your RRSP to a RRIF:
1. Know how much you’ll need
When planning out your retirement and determining how your RRIF will fit into your overall income plan, it’s a good idea to create a retirement budget. Getting a sense for your monthly living expenses, as well as any extra costs such as travel, entertainment, and family expenses will help to figure out how much you will need each month. Then take a look at all of your current and future sources of income to create your retirement paycheque — such as Old Age Security, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), income from an employer pension, or from a business or part-time work. Your CIBC Imperial Service advisor can help you in creating a customized retirement plan for you.
Like your RRSP, investments held within your RRIF can continue to grow on a tax-deferred basis. The longer you keep them there, the more time they have to grow.
If you find you won’t need to rely on your RRIF to cover the bulk of your ideas for retirement, it may be a better option to only withdraw the minimum amount required, which may help maximize the amount of your other benefits and minimize your taxable income.
While you must convert your RRSP before December 31 of the year you turn 71, it may be useful to consider the impact of converting before then to generate RRIF-sourced income. Your CIBC Imperial Service advisor can go over this with you.
2. Be mindful of your taxes
Keep in mind that when you withdraw from your RRIF it is considered income, and therefore subject to tax in the year you withdraw. Your RRIF withdrawal will be added to your other sources of income to create your retirement paycheque, and you will have more taxable income for the year. This may not only affect your taxes but could also result in clawback of certain income-tested government benefits, such as the Guaranteed Income Supplement or Old Age Security benefits.
To help reduce taxes, here are a few things you can consider:
Don’t take payments before you need them. Remember, once you transfer your RRSP to a RRIF, you have to start withdrawing a minimum payment by the end of the year after you opened the RRIF.
Don’t take more than you need. While it might be tempting to give yourself a bigger retirement paycheque, all of the income you receive is taxable. That extra income could put you in a higher tax bracket unnecessarily and drain your RRIF too quickly.
Consider the benefits of tax-deferred growth. Your RRIF works like your RRSP in that the funds in your plan grow on a tax-deferred basis. The longer you keep them there, the more time they have to grow to meet your retirement needs over the years.
Invest extra in a Tax-Free Savings Account (TFSA) if your minimum withdrawal payment is more than you need — you may be able to deposit the extra into a TFSA (up to your annual contribution limit) and continue to grow your savings and investments on a tax-free basis.
Base the minimum payments on the age of a younger spouse or partner. For example if your spouse or partner is younger than you, base the minimum payments on his or her age to make your minimum payments lower.
Look into income-splitting strategies that can be used with your RRIF, to reduce the overall tax bill of you and your spouse or partner.
Just because you’re retired doesn’t mean you’ve stopped investing for your future.
3. Understand the impact to your government benefits
The amount of retirement income you have could impact some of the benefits you are eligible to receive. Old Age Security, for example, can be impacted by the amount of income you earn over the year. If your income is too high, the amount of the benefit could be reduced, or even clawed back fully. By keeping your RRIF payments as low as possible, you may be able to maximize amounts from these other sources.
4. Choose the right investment mix
As your RRIF can hold a variety of different investments — it’s a good idea to hold a diversified portfolio within your plan to support your retirement income needs today, while balancing your needs for the next 20+ years. By diversifying by asset class and choosing both short-term and long-term investments, you can balance regular, stable returns with long-term growth.
5. Consider future estate taxes
By naming your spouse or partner as the “successor annuitant” of your RRIF, once your spouse or partner takes over upon your death, RRIF payments will simply continue without any interruption to the payment schedule. This move may allow the RRIF to bypass your estate, avoiding administrative fees and estate taxes.