Q: I have various RRSP accounts and am considering converting some (all) to RRIFs. Must I convert all my RRSP accounts to RRIF at the same time for the total amounts? I am 68.
A: By the end of the year that you turn 71, you need to either convert your RRSP to a RRIF or use your RRSP to purchase an annuity. A Registered Retirement Income Fund (RRIF) is like an RRSP in reverse – you take withdrawals instead of making deposits. Those withdrawals are based on age, with minimum mandatory withdrawal rates rising over time.
At 68, you can still have an RRSP account or even multiple RRSP accounts, Jerry. You can contribute to your own RRSP up to and including the year you turn 71, subject to your RRSP room. If you have a spouse under the age of 71, you can even contribute to a spousal RRSP after you’re age 71 to the extent that you still have RRSP room of your own.
When you convert an RRSP to a RRIF account, Jerry, it’s an election you make by account. In other words, you don’t have to convert all of your RRSP accounts to a RRIF. You can convert some accounts while leaving other RRSP accounts intact.
If you’re only taking the minimum withdrawal from a RRIF account, the financial institution doesn’t even need to withhold income tax. But keep in mind, your ultimate tax owing will be calculated on your tax return by adding together all your various sources of income. No withholding tax doesn’t mean no tax to pay. You may very well have a large tax bill on a minimum RRIF withdrawal when you file your tax return if your other sources of income are high.
So while having RRSPs and RRIFs is possible, I think the main question here is whether you should have an array of accounts, Jerry.
Some people will purposely convert some or all of their RRSP account(s) to a RRIF in order to ensure they have at least $2,000 of pension income per year after the age of 65. RRIF withdrawals count as eligible pension income for the purpose of the pension income tax credit, a tax credit you claim on your tax return that will make that $2,000 of income tax-free, or close to it, for most retirees.
Some people even go so far as to open a RRIF account with at least $14,000 at 65, so they can take $2,000 each year from 65 to 71 (seven years inclusive x $2,000 per year). Minimum mandatory withdrawal rates between 65 and 71 range from 3.85% to 5%, so if your RRSP account is below $50,000 or you need the income anyway, you might as well convert your whole RRSP to a RRIF rather than getting fancy.
Delaying RRIF withdrawals until age 72 may be a poor strategy if you have low income in your 60s and a large RRSP. You may pay more tax over your lifetime by delaying your withdrawals than if you took modest withdrawals in your 60s.
If you have multiple RRSP and RRIF accounts, chances are you don’t have a good sense of your investment asset allocation, Jerry. It’s hard to get a sense of what you’re invested in and where your money is if it’s in different financial institutions. Having your money in the same place may enable you to assess your investments better.
Consolidation can also help reduce your investment fees or expand your investment options. Often, you need to have certain minimum amounts to qualify to work with certain advisors, certain companies or even purchase certain investments. Or if your account size exceeds a threshold, you may qualify for lower fees. Even DIY investors may find they have administration fees waived upon exceeding certain thresholds or their commission rate changes.
In summary, Jerry, I think I would consolidate your accounts in one place in order to better invest your money first and foremost. Beyond that, with age 71 looming, you should consider if you might as well start taking your minimum RRIF withdrawal now for all of your registered accounts rather than delaying.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever
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