(NC) 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. David Ablett, director of tax and estate planning at Investors Group, shares his advice on the benefits of a RRIF and what you need to know to make it work best for you.
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 do so. 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.
Know the “ins” and “outs”. As with an 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 but there is no maximum. However, you will have to pay tax, based on your marginal tax rate, on whatever you take out. “If you take a large amount from your RRIF, you could be exposing yourself to a clawback of your Old Age Security payments,” says Ablett.
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 You’ll have to pay taxes on the amount that is withdrawn from your RRIF, but then the money can continue to grow tax-free in the TFSA.