Converting Your RRSP

RRIFs, LIFs and Taxation

Any income from a Registered Retirement Income Fund (RRIF) or from a Life Income Fund (LIF) is taxable and must be added to your annual income.

In both cases, the law dictates the annual minimum withdrawal you are allowed to make. If the withdrawal is higher than the minimum, taxes are witheld at source on the exceeding amount. In Quebec, income taxes witheld (federal and provincial) will be 21%, 26% or 31%, depending on the withdrawal amount. In Ontario, federal taxes witheld will be 10%, 20% or 30%, depsnding on the withdrawal.

The withholding rate may be higher or lower than the actual tax rate that will apply to your income for the year. The adjustment will be made on your annual income tax return. To avoid a claim, you may choose to have additional taxes withheld on each withdrawal. There are also other measures that would minimize tax grabs.

If you wish to withdraw the minimum annual amount, request that the annual withdrawal limit be based on your spouse's age, if your spouse is younger. Then, your minimal withdrawal will be lower.

Minimize Taxes

To minimize taxes, consider the following:

• Convert a portion or the total of your RRSP, locked-in RRSP or LIRA if you do not get a tax credit for pension income.

Conversions are ideal (even if you don't need liquidities) when you do not get a tax credit for pension income. Under federal law, as of 65, you can get a tax credit on the first $1000 withdrawn annually from a RRIF/LIF. (Note: In Quebec, this credit is available for any age group but it is reduced for those with a joint net income exceeding $28,030 (2005). The reduction rate is 15%, to the extinguishment of the $1000 credit added to that for those over 65 and those living alone.)

• When you convert a joint RRSP into a RRIF, it is possible to keep the contributing spouse from being taxed on the withdrawals made from the RRIF.

If, during the current or two preceding years, your partner made a spousal contribution to your RRSP before it was converted into a RRIF, he or she will be taxed on a portion of the income from the annuitant's RRIF (three year rule) if the withdrawal exceeds the annual minimum. To avoid this, the annuitant should withdraw only the annual minimum for at least the first three years of the RRIF. As soon as three years pass without any contributions to a spousal RRSP, only the annuitant is taxed on RRIF withdrawals.

Should You Diversify Your Investment in an RRIF?

Common sense dictates that as a retiree, you should not be taking any risks with your money and should only be placing it in short-term investments. However, simply because your savings are in a registered retirement income fund (RRIF) does not mean that you should ignore short-term savings products that offer 100% guaranteed capital and returns.

When you turn 69 or 70, a wide range of options opens up. Our advice is to diversify the terms (one to five years) of guaranteed investment certificates (GICs). This way, you have access to ready cash and can benefit from better interest rates on the longer terms. You can even generate tax savings!

Before investing, you should decide on your financial goals, ideal returns, optimal term(s) and time frame for accessing the money, as well as your tolerance for market fluctuations.

Moreover, as you will need to withdraw amounts from your RRIF on a monthly or annual basis, you may want to place some of your savings in a personalized pension fund. This money is always accessible, and what you do not use can be invested in the medium to long term.

However, investing in a mutual fund with dividends will yield better returns if the investment is made in the non-registered part of your portfolio, as dividend income is taxed less than interest income.

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