RRSP and RRIF; Deregistration Strategy

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If you have contributed to an RRSP it is considered for tax purposes to be ‘registered’ ; as noted in the name; Registered Retirement Savings Plan (RRSP), and the same goes for its retirement income counterpart; the Registered Retirement Income Fund (RRIF)

The registration on these particular products indicate they are funds which are sitting in a tax deferred status.  In other words, it’s money you have not yet paid income tax on.  When you deposited the money you received a tax break based on the tax bracket you were in at the time of deposit.  Similarly, when you draw money out of your RRSP or RRIF, it is taxable in your hands at whatever tax bracket you are in at that point in time.  Retirement:  When you’re ready to start spending your RRSP savings.

The idea of a de-registration strategy is to draw registered funds from your RRSP or RRIF in a manner that is to your best benefit from a tax planning perspective.  It involves preparation and thinking about how to best pay tax on these funds when you take them out as income (or de-register them).  Strategically timing registered withdrawals is important.

Planning for your registered assets

Your RRSP and RRIF, their tax deductions and tax deferred growth go hand in hand with tax planning.  As a result, it is important to understand what the savings and withdrawal of these products means to your personal after-tax bottom line.  Taxes.  Pay less, keep more; with after tax planning.

Over the years you contributed to your RRSP savings and attained annual tax savings. Ideally you also want a withdrawal strategy to spread out the tax liability over a number of years to get your best tax savings.

Much of this planning needs to be done in the several years preceding retirement and into retirement to best maximize your income and assets.  If we take a look at the RRIF rules it’s easy to assume you should automatically convert an RRSP to a RRIF at age 71 and withdraw the minimums each year but this isn’t necessarily the case.  These are merely minimum payment and maximum age parameters.  What works for you may be very different from someone else.  You and your financial professional should determine how to work within these parameters and tailor them in a way that works best for you.

When to convert to a RRIF

There can be good reason to convert to a RRIF at a younger age or draw income above the minimum levels even if it isn’t needed for living expenses.  This is where deregistration strategies come in.  The idea of a de-registration strategy is to draw registered funds from your RRSP or RRIF in a manner that is to your best benefit from a tax planning perspective.  It involves preparation and thinking about how to best pay tax on these funds when you take them out as income (or de-register them).  Strategically timing registered withdrawals is important.

Figuring out your RRIF income level

If you draw too much money from your RRIF annually you may risk putting yourself in a high tax bracket that negates some of the benefits of your tax deferral to a lower tax bracket.  If you recall, with the RRSP you want to write off the income in a high tax bracket and withdraw in a low tax bracket in order to use it most efficiently and pay the least amount of tax possible.   Also if you are drawing too much money from your RRIF annually, it could interfere with your Old Age Security (OAS) eligibility and put you in a clawback position, and subject to OAS recovery tax.  This is where you need to pay attention to future projected RIF minimums in your planning.  Retirement Income.  Why RRIF minimums might matter to you.

RRIF tax considerations

If the combination of your projected RRIF minimums in retirement plus your other pensions and income puts you over certain tax brackets or clawback levels there is good reason to start to de-register these products earlier and pay the taxes in a lower tax bracket wherever possible one step at a time.  This needs to be done over a number of calendar years in order to maximize the benefit.  This is not to say you need to spend this income.  Many strategies involve simply converting to another savings vehicle which carries less tax liability into retirement ie. Tax Free Savings Account (TFSA) up to your available limit wherever possible.

RRIF estate considerations

There are also estate considerations for registered retirement funds.  If you draw too little income from your RRIF, you risk leaving too much registered money in your possession, and possibly to your estate with taxes still owing.  RRSP’s and RRIF’s can be a big tax liability upon death.

While registered funds can roll from one spouse to another upon death without tax implications, where there is no spouse, all registered money is considered to be income in the year of death.  This usually means income tax is payable at the highest tax bracket which can significantly reduce the inheritance for beneficiaries. 

No one size fits all

Every situation is unique.  What’s good for your brother or neighbor may not be what’s best for you.  Where registered accounts have lower balances, deferring income for longer periods can make sense.  Investors who have high RRSP balances should seek advice on future income and projected tax liabilities to make sure you have everything taken into consideration.  The timing of registered withdrawals is important to make sure funds are withdrawn in the most effective manner possible.

Related

Retirement.  When you’re ready to start spending your RRSP savings

Retirement Income.  Why new RRIF rules might matter to you.

Taxes.  Pay Less, keep more; with after tax planning

Financial advice.  What’s it worth?

Stephanie Farrow, B.A., CFP.,  Stephanie has over 25 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and a Certified Financial Planner designation.  Stephanie has been writing financial planning columns for local business magazine Elgin This Month since 2010.  Stephanie and her husband Ken Farrow own Farrow Financial Services Inc.  About our Farrow Financial Team.

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