RRSP/RRIF conversion question

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izzy
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RRSP/RRIF conversion question

Post by izzy »

I wonder if the experts on this board can give me an opinion on the following theoretical situation?
I am 72 years old and have a very small RRIF based on my wife's age in a certain credit union. My wife who is 66 has a much larger RRSP ,spousal in origin ,in the same credit union and I am her successor annuitant.If my wife were to predecease me before she reaches the maximum age for an RRSP could I roll her RRSP over into my already existing RRIF in the same credit union and continue to base my mandatory withdrawals on her age with the intent of maximising my children's inheritance? Or must I set up the new RRIF based on my own age since she is deceased? This is a theoretical situation only but entirely possible in this age group and there does not appear to be anything covering it in FINIKI at present . Might it not be a good suggestion re RRIF planning for future heirs?
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Re: RRSP/RRIF conversion question

Post by kcowan »

I don't know the answer.

I would apply the following logic. No change to your RRIF. Your wife's would be governed by estate rules. You are a successor annuitant. So the RRSP would be tax protected but would have to convert to a RRIF in the year of her death.

Looking forward to expert opinions. I am in the same boat, one year behind, so interested.
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Re: RRSP/RRIF conversion question

Post by Spudd »

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.

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Re: RRSP/RRIF conversion question

Post by izzy »

kcowan wrote:I don't know the answer.

I would apply the following logic. No change to your RRIF. Your wife's would be governed by estate rules. You are a successor annuitant. So the RRSP would be tax protected but would have to convert to a RRIF in the year of her death.

Looking forward to expert opinions. I am in the same boat, one year behind, so interested.
Yes but the real question is whether it would have to be based on my age or could it be rolled into my existing RRIF which is currently based on her age? If so it would seem to be a wise precaution for everyone who is an older spouse to establish a small RRIF in advance based on the younger spouses age, which is why I raised the issue.
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Re: RRSP/RRIF conversion question

Post by Peculiar_Investor »

izzy wrote:If my wife were to predecease me before she reaches the maximum age for an RRSP could I roll her RRSP over into my already existing RRIF in the same credit union
I'm far away from having to worry about RRIFs et al, but I did search the CRA website and found Amounts paid from an RRSP or RRIF upon the death of an annuitant | CRA
You can contribute to your RRIF any amounts you receive or are considered to have received from a deceased annuitant's RRSP if:
• the annuitant under an RRSP dies and, at the time of death, you were the deceased annuitant's spouse or common-law partner;
• you were a financially dependent child or grandchild of the deceased annuitant who depended on the annuitant because of a physical or mental infirmity. If this is the case, you may be able to transfer the amount even if the deceased annuitant had a spouse or common-law partner at the time of death.
which would seem to indicate the rollover is possible.

The second part of the question is a bit more challenging
and continue to base my mandatory withdrawals on her age with the intent of maximising my children's inheritance?
The technical details on RRIF withdrawal amounts are covered in IC78-18R6 Registered Retirement Income Funds | CRA but this section seems on point
CRA wrote:before any payments are made under the fund, the annuitant has to elect to use the prescribed factor corresponding to the age of the spouse or common-law partner when calculating the minimum amount. Once the election is made, it cannot be changed, even if the spouse or common-law partner dies. However, the annuitant can establish another RRIF by transferring funds and then make a new election for this other RRIF.
Based solely on this layperson's read of the two sections, I would seem that it should be possible to achieve your goal of rolling over the RRSP into the RRIF and continue to have mandatory minimum withdrawal amounts be based on her age.

Anyone else read this differently?
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Re: RRSP/RRIF conversion question

Post by izzy »

Many thanks guys
if that is correct it would seem to me a good idea for a reference to that effect to be entered into FINIKI in the RRIF and estate planning sections as it seems a simple enough thing to set up a very small RRIF using the younger spouses age particularly if/when his/her health seems threatened.
I must admit I don't know how to post to FINIKI myself but perhaps one of you experts will deal with it ?
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Re: RRSP/RRIF conversion question

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Re: RRSP/RRIF conversion question

Post by OhGreatGuru »

I can't find a reference, but I think it unlikely that you could base withdrawals on the age of the deceased spouse. The new (rolled-over) RRIF becomes the property of the survivor, who becomes both owner and annuitant. I think withdrawals would have to be based on his age. At the point in time when the survivor receives ownership, he no longer has a (living) spouse.

If this loophole exists, I'm sure CRA will close it, because otherwise it would circumvent the legislation's intent about the progressive draw-down of RRIFs (and resultant taxation of withdrawals) with age.
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Re: RRSP/RRIF conversion question

Post by Norbert Schlenker »

At first blush, I would have agree with OhGreatGuru, but after some looking I think Peculiar_Investor above has it right, which should make izzy happy. You have to combine three different pieces of CRA guidance, two of which were linked by P_I above plus ...
Death of an RRSP Annuitant (CRA) wrote:We do not consider the deceased annuitant to have received an amount from the RRSP at the time of death if the annuitant had a spouse or common-law partner when he or she died and both the following conditions are met:
  • the spouse or common-law partner is named in the RRSP contract as the sole beneficiary of the RRSP; and
  • by December 31 of the year following the year of death, all the RRSP property is directly transferred to an RRSP or a registered retirement income fund (RRIF) under which the spouse or common-law partner is the annuitant, or to an issuer to buy an eligible annuity for the spouse or common law partner.
This specifically allows the rollover of the deceased's RRSP into the survivor's existing RRIF which, in izzy's case (and could be in others too), was irrevocably committed to a payment schedule based on the deceased's age when it was set up.

It's a good planning tip. Thanks to all the contributors above.
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Re: RRSP/RRIF conversion question

Post by izzy »

Not sure that the prospect of surviving my spouse would make me all that happy but it's an interesting exercise in logic! For what it's worth my train of thought was as follows;
1.I am over 72 and have a RRIF in bank A
2.My younger spouse has her own RRSP and a spousal RRSP in bank B so I can still make RRSP spousal contributions if I have earned income
3.We are both successor annuitants under one another's plans
4.If I predecease my spouse the situation is simple, she can roll everything into the same plan for convenience and base RRIF payments on her age if she so desires.
5.If she predeceases me it gets more complicated; I cannot have an RRSP so the RRSPs must be converted to a RRIF and as
"Oh Great Guru" reasons that would have to be based on MY age, but what happens if I now roll the RRIF in bank B into the pre existing RRIF in bank A?
Essentially do I have a choice which of our ages I use to set minimum payments if I combine the RRIFs and does it matter whether I roll what used to be her plan into mine or vice versa?
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Re: RRSP/RRIF conversion question

Post by Norbert Schlenker »

izzy wrote:If she predeceases me it gets more complicated; I cannot have an RRSP so the RRSPs must be converted to a RRIF and as
"Oh Great Guru" reasons that would have to be based on MY age
No, because of CRA's language in the link I gave above. If she predeceases you, you must roll her RRSP into either your RRSP (not applicable to your case) or your RRIF in order to avoid taxability on her final return. Since your RRIF already exists, and the payment schedule from it has already been set in stone based on her age, your age will never come into it. You have exactly what you wanted. Celebrate.

As for what happens if one tries to amalgamate two RRIFs that are on different schedules (obvious and likely common case: spouses of different ages both over 71, each with their own RRIF with payment based on their own age, and then the younger one dies), I'll bet that with care it's possible to preserve the earlier age schedule. If the survivor becomes the successor annuitant on the deceased's plan, and then transfers his/her own RRIF assets into the deceased's plan, then I think the schedule survives.

If you want to be really aggressive about it, and I believe this is possible based on the wording in P_I's links, after being widowed you marry a much younger person, open a new RRIF with a payment schedule based on your new spouse's age, and roll over existing RRIF assets into the new RRIF. Find a 25 year old trophy wife / boy toy and you can slash the mandatory withdrawals to 1 / (90 - 25) = 1.6% per year!
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Re: RRSP/RRIF conversion question

Post by izzy »

Norbert Schlenker wrote:
izzy wrote:If she predeceases me it gets more complicated; I cannot have an RRSP so the RRSPs must be converted to a RRIF and as
"Oh Great Guru" reasons that would have to be based on MY age
No, because of CRA's language in the link I gave above. If she predeceases you, you must roll her RRSP into either your RRSP (not applicable to your case) or your RRIF in order to avoid taxability on her final return. Since your RRIF already exists, and the payment schedule from it has already been set in stone based on her age, your age will never come into it. You have exactly what you wanted. Celebrate.

As for what happens if one tries to amalgamate two RRIFs that are on different schedules (obvious and likely common case: spouses of different ages both over 71, each with their own RRIF with payment based on their own age, and then the younger one dies), I'll bet that with care it's possible to preserve the earlier age schedule. If the survivor becomes the successor annuitant on the deceased's plan, and then transfers his/her own RRIF assets into the deceased's plan, then I think the schedule survives.

If you want to be really aggressive about it, and I believe this is possible based on the wording in P_I's links, after being widowed you marry a much younger person, open a new RRIF with a payment schedule based on your new spouse's age, and roll over existing RRIF assets into the new RRIF. Find a 25 year old trophy wife / boy toy and you can slash the mandatory withdrawals to 1 / (90 - 25) = 1.6% per year!
So you (or at least your RRIF) could potentially, at least in theory, live forever :wink: don't tell my wife :!:
Of course, by the nature of things, trophy wives tend to be an extravagance few of us could afford and unlikely to be conducive to longevity anyway!
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Re: RRSP/RRIF conversion question

Post by OhGreatGuru »

I don't see where this "cast in stone" payment schedule comes from. That would apply to an RRSP/RRIF-Annuity, but not to a RRIF generally. An annuity payment is cast in stone when the annuity is purchased. But if we are talking about a RRIF that is vested in saleable securities, the rate of withdrawal can be changed - and in fact you can change it voluntarily any time if you want to withdraw more then the minimum withdrawal amount. So I stand by my previous best guess.

PS. There is a statement in a CRA guide that once you decide which spouse's age to base RRIF payments on, you can't change it. But I'm not convinced that is intended to include what happens after the annuitant dies. It does not make sense to me, for example, that a 90-yr old beneficiary can rollover the RRSP of a spouse who was 25 years younger and continue to withdraw it at the younger spouse's age. But perhaps logic doesn't prevail.
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Re: RRSP/RRIF conversion question

Post by izzy »

OhGreatGuru wrote:I don't see where this "cast in stone" payment schedule comes from. That would apply to an RRSP/RRIF-Annuity, but not to a RRIF generally. An annuity payment is cast in stone when the annuity is purchased. But if we are talking about a RRIF that is vested in saleable securities, the rate of withdrawal can be changed - and in fact you can change it voluntarily any time if you want to withdraw more then the minimum withdrawal amount. So I stand by my previous best guess.

PS. There is a statement in a CRA guide that once you decide which spouse's age to base RRIF payments on, you can't change it. But I'm not convinced that is intended to include what happens after the annuitant dies. It does not make sense to me, for example, that a 90-yr old beneficiary can rollover the RRSP of a spouse who was 25 years younger and continue to withdraw it at the younger spouse's age. But perhaps logic doesn't prevail.
It's a very unlikely scenario though, more an intellectual exercise than anything else. Most spouses are less than 10 years apart in age and if the age difference were any greater the chance of the older outliving the younger by enough years to make a significant difference would be very remote- just think of your example of a 90 year old married to a spouse 25 years younger . Thus the potential for a significant tax advantage is so small that CRA would not likely find it worth the time, expense and effort to try and change the rules.
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Re: RRSP/RRIF conversion question

Post by Come on Eileen »

izzy wrote:
OhGreatGuru wrote:It's a very unlikely scenario though, more an intellectual exercise than anything else. Most spouses are less than 10 years apart in age and if the age difference were any greater the chance of the older outliving the younger by enough years to make a significant difference would be very remote- just think of your example of a 90 year old married to a spouse 25 years younger . Thus the potential for a significant tax advantage is so small that CRA would not likely find it worth the time, expense and effort to try and change the rules.
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Re: RRSP/RRIF conversion question

Post by Arby »

I'll be turning 65 in 2014, and will be setting up a RRIF to take adavantage of the pension income tax credit. According to CRA, minimum withdrawals must begin in the year after the RRIF has been established. If I want make withdrawals in the same year of the RRIF's establishment (i.e. in 2014), will the 2014 withdrawal qualify for the pension income tax credit? In order to qualify, does the withdrawal have to be made after the date that I turn 65, or merely in the same year as I turn 65?
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Re: RRSP/RRIF conversion question

Post by freedom_2008 »

CRA counts everything else based on the year (not the date after), I don' t see why pension income credit would be counted otherwise.

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Re: RRSP/RRIF conversion question

Post by Arby »

Thanks freedom_2008. According to your linked article, RRIF withdrawals during the year I turn 65 will be eligible for tax credit.

Another tax implication is that withdrawals during the year the RRIF is established will incur withholding tax on the full amount of the withdrawal. In subsequent years, withholding tax will only apply on amounts greater than the required minimum withdrawal.
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Re: RRSP/RRIF conversion question

Post by hrguy »

How do you do all these conversions before 70? I plan on retiring next year at 56 and will have money in both RPP and RSP. How do I withdraw without getting killed by taxes?
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Re: RRSP/RRIF conversion question

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hrguy wrote:How do you do all these conversions before 70? I plan on retiring next year at 56 and will have money in both RPP and RSP. How do I withdraw without getting killed by taxes?
I don't understand the question. You can convert your RRSP to a RRIF at any age. The advantage of doing that at, say, 56 is that financial institutions typically charge fees on RRSP withdrawals but not RRIF withdrawals. The disadvantage is that you have to make the mandatory minimum withdrawal each year. At age 57 that's just a tad over 3% of the Jan 1 balance.

RRIF withdrawals by those aged 65+ are eligible for the pension income credit and pension income splitting, but the pension from your RPP already generates that credit.

BTW, you didn't indicate if your RPP pension is DB or DC. If DB you'll have no control over the timing and amount of income. If DC you will. A DC RPP is much like a RRIF.
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Re: RRSP/RRIF conversion question

Post by AltaRed »

hrguy wrote: How do I withdraw without getting killed by taxes?
Any withdrawals from a RPP or a RSP or a RIF are taxed at full income tax rates. That is the way it should be since you got tax deductions along the way when you made contributions to your RPP and/or RSP.

The best you can do, as Bruce suggested, is manage the amount of the withdrawals where possible to minimize tax bracket creep. For example saying out of the 26% (or 29%) federal rate as the case may be.
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Re: RRSP/RRIF conversion question

Post by ghariton »

AltaRed wrote:The best you can do, as Bruce suggested, is manage the amount of the withdrawals where possible to minimize tax bracket creep.
Also watch out for OAS clawback after 65. That may require you to pull out larger anounts before 65.

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Re: RRSP/RRIF conversion question

Post by AltaRed »

Agreed but OAS clawback is a nice problem to have if not much can be done about it. I'd be more than happy to give it all back.
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Re: RRSP/RRIF conversion question

Post by ghariton »

AltaRed wrote:Agreed but OAS clawback is a nice problem to have if not much can be done about it. I'd be more than happy to give it all back.
I vaguely recall that a few years ago Bruce Cohen created a simple calculator to estimate whether one should "melt" one's RRSP before 65. If one has a big enough pile, then I suspect that pulling most of it out at age 64 may make sense.

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Re: RRSP/RRIF conversion question

Post by izzy »

ghariton wrote:
AltaRed wrote:Agreed but OAS clawback is a nice problem to have if not much can be done about it. I'd be more than happy to give it all back.
I vaguely recall that a few years ago Bruce Cohen created a simple calculator to estimate whether one should "melt" one's RRSP before 65. If one has a big enough pile, then I suspect that pulling most of it out at age 64 may make sense.

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Those of you who have not yet reached 65 can now avoid clawback and do a meltdown even after you do reach 65 by deferring OAS,also,because your deferred OAS payment will be larger, you may then be able to realize a higher income before you lose it all.
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