Feb 08 2013

Pros and Cons: Withdrawals from RRSP or RRIF

Pros and Cons: Withdrawals from RRSP or RRIF

I often get questions about “how to begin payments from an RRSP?” or “when to start a RRIF”? What follows is a high level overview when contemplating withdrawals for either type of plan.

RRSP = Registered Retirement Savings Plan (sometimes just called RSP for short)

RRIF = Registered Retirement Income Fund (sometimes just called RIF for short)

Firstly, withdrawals from RRSPs or RRIFs are taxed as ordinary income. Each year, you will receive a tax slip from the financial institution showing the total withdrawals made during the calendar year.

Remember that when you contributed to your RRSP, you received a corresponding tax deduction. which reduced your taxes owning at that time.  Assuming you were in a higher tax bracket then than now, you pay less tax overall and just as important, you “deferred taxes” on the earned income since the contribution…perhaps 30 to 40 years.

 So When Do You Withdraw from an RRSP?

You can withdraw all or any amount from an RRSP as you require but as mentioned before it’s taxed as income. and will be subject to withholding tax, meaning the government requires a portion of the tax pre-paid, and you get the balance. See the chart below for the percentage withheld based upon the amount withdrawn.

Withholding Tax from Registered Plans

 

So for  a $10,000 withdrawal, withholding tax would be 20% or $2,000 and you receive the difference i.e.$8,000.  When you receive the tax slip it shows both the withdrawal and the withholding tax paid.

Therefore for lumps sum withdrawals, you might want to withdraw from your RRSP

 So When Do You Withdraw from a RRIF?

Here are a few of the main rules for RRIFs

  1. You must convert your RRSP to a RRIF in the year you turn age 71.
  2. You must withdraw a minimum, know as a RRIF minimum each year, based upon the following table (no withdrawal is mandatory during the first year of the RRIF).

 

Age

Minimum Annual RRIF Withdrawal (%)

71

7.38

72

7.48

73

7.59

74

7.71

75

7.85

76

7.99

77

8.15

78

8.33

79

8.53

80

8.75

81

8.99

82

9.27

84

9.93

85

10.33

86

10.79

87

11.33

88

11.96

89

12.71

90

13.62

91

14.73

92

16.12

93

17.92

94 or older

20

Note: For RRIF withdrawals before age 70, the Minimum Annual RRIF is calculated using (1 /(90 – age)). An example for a 65 year old is (1/ (90-65)) or 1/25 or 4% annual minimum.

Therefore for regular recurring withdrawals, you might want to withdraw from your RRIF but remember the RRSP must be converted to a RRIF in the year you turn 71.

Other Notes:

  • There is no maximum RRIF withdrawal. You can withdraw it all at any time.
  • No requirement to change the investments when converting an RRSP to a RRIF.

For more information, click here for the Canada Revenue Agency (CRA) website.

There are many strategies around RRSPs and RRIFs and how to optimize the withdrawals but they depend upon your personal situation and are beyond this scope of this introductory article.

For more information, please contact me by completing the Contact Me form on this site or calling me directly at  613 766 0427.

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