If you are converting your RRSP into an RRIF this year, here are five things to consider.
Making one last RRSP contribution
If you are 71 years old and still have RRSP contribution room, consider making one last RRSP contribution – especially if you are going to be in a lower tax bracket going forward. RRSP contributions are generally not allowed for people over age 71, so this may be your last opportunity for a large tax deduction in one year.
Make sure to name a Beneficiary on your RRIF
Beneficiaries named on RRSP accounts do not automatically transfer over to your new RRIF account. If you want to transfer your RRSP assets directly to your beneficiary – without going through your estate – be sure to name a beneficiary on your RRIF account. Failure to do so may result in complex estate settlement matters or unintended distributions.
Whose age should you use to calculate RRIF minimums?
When you set up your RRIF you have the option to calculate payment based on your own age or the age of our spouse or common-law partner. If your goal is to maximize the tax-deferral on income from your RRIF, it is generally best to calculate your annual RRIF payment based on the younger person’s age. This will result in smaller mandatory withdrawal amounts and will allow for a longer period of tax-deferral.
Should you have withholding tax deducted from your RRIF payments?
If you are withdrawing the minimum amount from your RIFF, the trustee does not usually withhold any taxes; unless you request them to do so. Withdrawals from your RRIF are considered income and will be subject to tax when you file your return. If you receive other forms of taxable income that are not subject to withholding tax (for example, interest income, dividend payments or capital gains from the sale of an investment), you may want to increase the amount of withholding tax being taken from your RRIF payment. This will help off-set taxes owing on your other sources of income and reduce the amount of tax owing when you file your income tax return at the end of the year.
Using the Pension credit on RRIF income
If you are 65 or older and receiving (or about to receive) RRIF income, consider claiming the pension credit on your federal tax return for up to $2000 of RRIF income. A similar tax credit is available provincially, although there are some differences across the provinces. The federal credit is worth $300 and can be used to offset tax payable on any other form of income. The credit cannot be carried forward to a future year, so be sure to claim the credit when available. If you are under the age of 65, the pension credit is available for your RRIF income only if received because of the death of a spouse or common-law partner.
If you or someone in your family is converting their RRSP to a RRIF this year, be sure to contact me to ensure the transition goes smoothly, and of course making sure all of the above considerations are taken into account.
Have a great weekend,
Tracey
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