Personal Tax Strategy

Attention Baby Boomers:

Here's everything you need to know about RRSP to RRIF transfers

There are nearly 10 million Baby Boomers in Canada born between 1947 and 1966, who are starting to enter retirement. To help fund their retirements, many will soon be converting Registered Retirement Savings Plans (RRSPs) to Registered Retirement Income Funds (RRIFs). To help, Wilmot George, Director, Mackenzie Tax and Estate Planning, has created the following step-by-step guide.

• 1 Whose age should you base your RRIF minimums on?

  When setting up your RRIF, you can calculate future RRIF payments based on the age of your spouse or common-law partner (CLP). If you want to defer as much the tax as possible, it is generally best to calculate annual RRIF payments on the age of the younger person. This results in smaller mandatory withdrawals and allows for a longer period of tax deferral.

  If you are under the age of 72, and don't need the cash received from mandatory RRIF payments you can transfer it back to an RRSP. Or if you have contribution room, you can put after-tax RRIF payments into a Tax-free Savings Account (TFSA) where it will grow tax free. Contributions to a non-registered investment account are also possible where tax-efficient dividends and capital gains can be realized.

• 2 Have you named a RRIF beneficiary?

  Beneficiaries named on your RRSP applications do not automatically carry over to RRIFs. If, at death, you want your RRIF assets to be transferred directly to your beneficiaries, you’ll have to name the beneficiaries directly on your RRIF application. Failure to do so may result in their RRIF assets passing through your estate where they could be subject to complex estate settlement matters and unintended distributions. Estate administration fees may also apply.

  If want your spouse or CLP to inherit the RRIF, name them as “successor annuitant” or “beneficiary” on their RRIF application. Assuming tax minimization at death will be a priority, the successor annuitant designation allows spouses and CLPs to receive the deceased’s RRIF based on the plan’s original terms and conditions.

  For example, if the deceased annuitant was receiving RRIF minimum payments based on the deceased’s age, the payments would continue to the spouse or CLP based on the deceased’s age. But if the deceased was younger than the surviving spouse or CLP, using the deceased’s age would result in smaller mandatory RRIF payments and a longer period of tax-deferred growth. When a spouse or CLP is named beneficiary,  future RRIF payments are calculated based on the survivor’s age, which would mean larger RRIF payments if the spouse or CLP were older than the deceased.

• 3 Do you want to increase the withholding tax on RRIF payments?

  RRIF payments are generally subject to a withholding tax of up to 31%, depending on the amount redeemed. If you are planning to receive other forms of taxable income that are not subject to a withholding tax at source (e.g., capital gains from the sale of investments, interest payments or dividends), you can contact the RRIF issuer to request an increase in withholding tax on RRIF payments. By doing so, you can prepay tax payable on other sources of income and reduce the amount of taxes owed at year end.

• 4 Can you claim the pension credit for RRIF income?

  If you are 65 or older and receiving (or about to receive) RRIF income you  can claim the pension credit on a federal tax return for up to $2,000 of RRIF income, provided the credit has not already been claimed for other eligible incomes  (e.g., payments from a private plan). A similar credit is also available provincially.
  The federal credit is worth $300, and can be used to offset tax payable on any form of income. The credit cannot be carried forward to a future year, so you should claim it when available. If you are under 65, the pension credit is available for RRIF income only if received as a consequence of the death of a spouse or common-law partner.

  If you are 65 or older, and eligible to claim the pension credit for RRIF income,  you can split the income with your spouse or CLP regardless of their age. Since 2007, income eligible for the pension credit is also eligible for pension income splitting. In cases where a spouse or CLP is in a lower tax bracket, an effective income-split will be achieved.

  Also, by transferring the RRIF income to a spouse or CLP (which is achieved simply by allocating the split on your respective tax returns – an actual cash transfer is not necessary), you may be able to double the pension credit you’re your family provided your spouse or CLP is 65 or older.

  But remember, when splitting income, you should be mindful of the Old Age Security (OAS) clawback thresholds, to ensure that income-sensitive OAS benefits are not reduced as a result of the split.  For 2010, you can report a net income of up to $66,733 before OAS benefits are reduced.