If you’re gearing up to retire in the next few years, you might start thinking about your various income sources. Converting your Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF) is just one part of the retirement planning puzzle. Georgia Swan, Tax and Estate Planner with TD Wealth, speaks with Greg Bonnell about what to consider when drawing down your RRIF.
* If you're getting close to retirement you may be starting to think about converting your RRSPs to a registered retirement income fund or RRIF. Before you do there may be certain things you want to consider. Here to tell us all about it is Georgia Swan, tax and estate planner with TD Wealth. Georgia, great to have you on the program. Let's start there. What do we need to know about making this switch in our lives? * Well, thanks for having me, Greg. And really, the first thing you have to think about is that you have to convert your RSP to a RRIF by the end of the year in which you turn 71. So when you're thinking about this issue the first thing to consider is basically do you need the money? If you need the money and it's the only source of income you have in your retirement, then the right time is now. * But if you don't need the money immediately or if you know that you're going to receive income from other sources, like pension, like other types of investments, if you have rental properties, then really, at least a couple of years before retirement, you should start asking these questions and start consulting with your investment advisor and tax advisor to do some projections about what it looks like when you do retire when you're receiving the income from the different sources, and when it might be best at that point to either convert early or wait until that last possible moment. * OK, so someone's done the math on that. They figured out what works for them and their individual circumstance. Of course, at some point, you're going to start drawing from the RRIF. That's the whole point. You've been working for this your whole life. What do you need to be mindful there in terms of timing? * So in terms of timing, when you convert there are mandatory minimums that start having to be taken, and those mandatory minimums go up as you get older. So as I said, if when you retire you're not receiving income from anything else, then absolutely, you can start drawing that mandatory minimum and perhaps even more than that mandatory minimum. If however, you are receiving income from elsewhere, you want to try to be careful that when you receive that minimum amount it's not actually forcing you into a higher tax bracket, or perhaps your OAS is getting clawed back as a result of this amount. So you want to balance the more flexible parts of your income-- so that what you're getting from non-registered accounts or things like that-- against the fact that you're being forced to at least that amount out of your RRIF. * When would it make sense, you talked about minimum requirements when we're talking about a RRIF, is there a situations or are there situations that make sense to maybe take a little bit more than that? What would the advantages be to that? * Well, absolutely. Like I said, if you can be flexible with respect to the other sources of income you're getting then maybe it's a good idea to actually pull out more than that minimum from your RRIF in order to draw it down. I think a lot of people don't realize that a RRIF or an RSP really is an incentive to save for retirement. And while it is a tax planning measure in the short term, when you're trying to keep as much in your pocket on a day to day basis because you're raising your kids, or paying off your student loans, or just making ends meet, eventually when you pull that money out it is fully taxable as regular income, which is what most people would understand it as. So it may make sense to be pulling out more than that minimum and deferring the receipt of income from some of those other sources so that you can draw it down. *You also have to remember that if you die with a significant amount of money left in your RRIF and you designate someone other than your spouse as a beneficiary, while they're going to receive the money, so let's say you pass away with $300,000 left in your RRIF. They get the $300,000, but the full amount of that income lands on your final tax return, and that can be a kind of offensive result if it ends up being taxed, for example, or being so much that it's taxed at the highest marginal tax rate in your particular province. So that's why when you're doing your long term planning it sometimes makes sense to really try to pull down that RRIF and let the other types of income that you have, like you non-registered investments continue to grow, because they have a little bit better tax treatment for example, at death. * I know when it comes to tax planning, I mean, there are so many considerations to make, if there is a spouse as part of the picture then what kind of calculations, or at least what kind of questions are we asking? * Well, if your spouse is younger than you, when you do the conversion you can actually use your younger spouse's age in order to calculate the amount of the minimums, and that makes them a little bit lower. If you are 65 years of age or older, you might want to consider actually partially converting your RSP into a RRIF, so not converting all of it. Because then you might be able to start taking advantage of the pension income tax credit or pension income splitting with your spouse. So there are some benefits if you are married to do that kind of-- or if you have a common law spouse, to do that kind of planning and investigating. * You talked about the tax implications, and obviously of the RRIF, and other investment vehicles, maybe some investments you have in a non registered plan. What if you throw a TFSA into the mix as well? How do we all start-- if you're looking across your portfolio holdings, and say, I've got a few things going on here, how do we start thinking about that? * Well, that's a question of where the optimal mix is of your income. And certainly, I mean, TFSAs are really one of the best things going. You can put the money in there, it can grow tax free, and if you just sort of let it go, that's going to be really the only truly source of tax free income that you are ever going to get. So at that point, you can start looking-- because whatever you're going to remove from your RRIF is basically it is what it is at least to the minimum amount. * You can start then looking at the more flexible investments that you have, balancing your portfolio or your non-registered portfolio in such a way where maybe you're receiving less of that immediate income that dividends or interest, and you're allowing it to grow more on the capital gains side. So a lot of times it does make more sense to draw down your RSP first, or your RRIF, excuse me, first, before looking to some of those more flexible sources of income, and then of course, leaving the TFSA to sit there and nicely grow. * Georgia, always great to get your insights. Thanks for joining us. * Thank you for having me.