What to do when moving into your RRIF years - Money In Your Pocket

The February Registered Retirement Savings Plan stampede is over for another year, but for some taxpayers their RRSP years are coming to an end.

That is because the government requires people to exit their RRSP in the year they celebrate their 69th birthday. This is not a simple process and it should be done with overall estate planning needs in mind.

If an alternative plan for the controlled windup of an RRSP isn’t set up, the government will automatically assume that the RRSP will be taken directly into income for the year, which could divert a significant portion of an accumulated nest egg to the taxman.

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Although there are several maturity options available that will allow people to reduce the tax impact of collapsing the RRSP, one of the most popular ones is to buy a Registered Retirement Income Fund. There are several strategies on how best to use a RRIF.

Generally, people who have other sources of income from investments that are not registered are better off using them before they access their RRSP funds after transferring them to a RRIF.

Dividend income from taxable Canadian corporations, for instance, or proceeds from the sale of stocks, which are subject to capital gains, are both taxed at lower rates than regular income such as what would be received from a RRIF.

So, it is often better to take a higher portion of income from these sources in the earlier retirement years rather than from a RRIF. This approach also leaves more in the RRIF to earn tax-sheltered income.

RRIFs are structured around a person’s age, requiring them to withdraw a minimum amount from the fund each year with the amount increasing as they age.

People can reduce the early portion of the RRIF withdrawals by making a one-time election with the Canada Revenue Agency at the start-up of the RRIF. Registration will be based on the age of the spouse if younger.

This means that if you are 69 and your spouse is 64, registering the RRIF based on your spouse’s age divides it into five additional years, thereby reducing the annual minimum payment required to be withdrawn from the RRIF.

Another option is to use a portion of RRSP funds to set up a small RRIF at the age of 65 to take advantage of tax credits that relate to qualifying pension income.

This amount has just doubled to $2,000 from $1,000 effective for the 2006 tax year. This transfer of RRSP funds to a RRIF is required because direct withdrawals from an RRSP are not considered qualifyingpension income.

By transferring $10,000 from an RRSP to a RRIF at age 65 and then withdrawing $2,000 per year from 65 to 69, a person is taking that $10,000 virtually tax free federally if they are in the lowest tax bracket – income less than $37,179 for 2007.

There will be some tax cost for those in higher brackets, depending on their marginal rate.

As well, if the federal proposal to allow pension income splitting for seniors in 2007 becomes law, this may offer a chance to double up on the pension income tax credit by triggering a $4,000 RRIF withdrawal per year.

My best advice, however, is to start planning early for the maturity of your RRSP and to seek professional advice on how best to integrate that income with your total financial needs for your retirement years.