Pros, Cons and Implications of converting RRSP to RRIF

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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D&NBur
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Pros, Cons and Implications of converting RRSP to RRIF

Post by D&NBur »

Can someone provide me with pros, cons and implications of converting RRSP to RRIF in simplified terminology? I need "Retirement for Dummies".
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Re: Pros, Cons and Implications of converting RRSP to RRIF

Post by Spudd »

I'm no expert and I haven't done it myself but here's my basic understanding:

Pros:
- if 65+, can then claim pension amount on taxes ($2000 annually)
- no fees to withdraw from RRIF at most institutions

Cons:
- Must withdraw a set amount annually whether you want to or not

Also, you MUST convert it in the year you turn 71.

That's all I know!
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kcowan
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Re: Pros, Cons and Implications of converting RRSP to RRIF

Post by kcowan »

Also can split the income with a spouse if over 65 and they also get another 2000.
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Shakespeare
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Re: Pros, Cons and Implications of converting RRSP to RRIF

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D&NBur
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Re: Pros, Cons and Implications of converting RRSP to RRIF

Post by D&NBur »

Thanks for the helpful responses. Any comments on advantages to avoiding the RRIF altogether by withdrawing from RRSP prior to age 71 and investing the capital? Tax implications? Estate implications?
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AltaRed
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Re: Pros, Cons and Implications of converting RRSP to RRIF

Post by AltaRed »

D&NBur wrote: 03 Jun 2017 12:48 Thanks for the helpful responses. Any comments on advantages to avoiding the RRIF altogether by withdrawing from RRSP prior to age 71 and investing the capital? Tax implications? Estate implications?
If you read various threads on drawing down RRSPs earlier (use the Search feature) and/or finiki as already linked, you would find answers to your questions. The main disadvantage to drawing down the RRSP early is the loss of value in deferring taxes.

Besides the 'pension amount' already mentioned, the main advantage would be to defer CPP and OAS until age 70 and drawing down the RRSP between the age of retirement and age 70, i.e. to stay within a lower overall MTR, and/or to reduce/eliminate OAS clawback. There are several threads with this analysis, especially by Longinvest. Make some effort to seach them out.

Personally, I don't understand the aversion to a RRIF and its annual withdrawal minimums. If you don't want to do that, buy an annuity at age 71 with the proceeds of your RRSP.
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GreatLaker
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Re: Pros, Cons and Implications of converting RRSP to RRIF

Post by GreatLaker »

This is a good, detailed article on which accounts to draw from first in retirement:
http://www.rgafinancial.com/articles/Wh ... rement.pdf
The tax rates are from Alberta a few years ago, but the principles are applicable in all provinces. Also I think it was written before there was an option to defer OAS to age 70.

The author provides good analysis on how much (if any) to draw from tax-deferred (RRSP, RRIF) accounts to avoid high taxes due to mandatory RRIF withdrawals, minimize OAS clawback and avoid increased taxes if one spouse passes away with a large RRSP or RRIF.

I also think that RRSPs and RRIFs get a bad rap. I see posters on investing forums saying they plan to aggressively withdraw from their RRSP so it is depleted by age 71 to minimize tax payable when mandatory RRIF withdrawals start. Those posters fail to realize that paying taxes later is usually better than paying taxes earlier. Withdrawing some money from registered accounts may minimize OAS clawback, but withdrawing more than necessary results in paying tax earlier instead of later.
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Arby
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Re: Pros, Cons and Implications of converting RRSP to RRIF

Post by Arby »

If you're planning to make withdrawals, there are a couple of advantages in converting an RRSP to RRIF:
- Save money on fees - many banks and brokers charge a fee of around $25 for each withdrawal from an RRSP. Usually there is no fee when withdrawing from a RRIF.
- Save money on taxes - withdrawals from a RRIF qualify for the pension income tax credit if you're over age 65. Withdrawals from an RRSP don't qualify for the tax credit.
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kcowan
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Re: Pros, Cons and Implications of converting RRSP to RRIF

Post by kcowan »

Also you give up the tax-free compounding UNLESS you definitely do it while your tax bracket is lower.
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Re: Pros, Cons and Implications of converting RRSP to RRIF

Post by chufinora »

One thing that is not obvious (At least it wasn't for me) you don't have to convert all your RRSP to RRIF at once. At TD they charge $25 to withdraw from RRSP but not from RRIF (And they would not waive the fee for me.) I opened a RRIF account and every year I transfer over the cash from my RRSP that I withdraw from my RIF.
If I transferred over all my RRSP I would be restricted in the minimum I could withdraw, and there is still a slim possibility that I may earn some $$'s one year and want the freedom to not withdraw from the RIF in any given year.

As an aside one thing that bugs me is before 65 the first $2000 withdrawn from a RIF does not qualify for the pension tax credit, yet any pension payments do.
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Re: Pros, Cons and Implications of converting RRSP to RRIF

Post by ghariton »

chufinora wrote: 04 Jun 2017 13:01 As an aside one thing that bugs me is before 65 the first $2000 withdrawn from a RIF does not qualify for the pension tax credit, yet any pension payments do.
By coincidence, the public servants who design the tax rules typically have very large pensions and correspondingly small RRSPs/RRIFs.

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