How RRIF withdrawals work when you have multiple registered accounts

Withdrawals from multiple registered accounts

I come across a lot of people who have had registered retirement savings plan (RRSP) accounts for 40 years and are unclear on how the withdrawal process works. So, your inquiry, Jackie, is a good one.

I will address your questions and explain a bit more about the tax and procedural considerations with registered account conversion.

RRSP withdrawal rules

You can take an RRSP withdrawal whenever you want. The only exception is with a locked-in RRSP that comes from a pension plan. You may not be able to take withdrawals prior to age 55, except for extraordinary circumstances that vary based on the province of the pension the funds were transferred from.

RRSP withdrawals are taxable. There are exceptions for Home Buyer’s Plan (HBP) withdrawals for a first-time home buyer and Lifelong Learning Plan (LLP) withdrawals for post-secondary education.

You do not need to convert your RRSP to a registered retirement income fund (RRIF) to take a withdrawal. But unless you buy an annuity or cash in your entire RRSP account, you need to convert it to a RRIF by December 31 of the year you turn 71.

In your case, Jackie, it sounds like you’re considering a partial conversion prior to age 71. There may be tax reasons for you to do this.

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Tax differences between an RRSP and a RRIF

Like an RRSP, a RRIF withdrawal is fully taxable. A key difference is that a RRIF has minimum withdrawals beginning the year after you open the account, based on the value on December 31 of the previous year. There is a withdrawal percentage that increases as you get older, forcing you to draw down the account over time.

The minimum annual withdrawal from your RRIF has no required withholding tax. Some people confuse this with the withdrawal being tax-free, which is not the case. RRIF and RRSP withdrawals are both added to your tax return for the year.

There may be a couple tax advantages to withdrawing from a RRIF over an RRSP, though, and that may be your motivation, Jackie.

RRIF income splitting

For one, you can split up to 50% of your eligible pension income with a spouse or common-law partner. This can reduce combined tax payable by moving income from your tax return to your spouse’s. RRSP withdrawals do not count, but RRIF withdrawals are eligible to split once you are 65.

Eligible pension income also qualifies for a federal pension income amount tax credit that reduces the tax payable on up to $2,000 of qualifying income. Provincial pension income amounts range from $1,000 to $2,000. So, a small amount of RRIF withdrawals may be tax free or close to it.

Partial conversion of an RRSP

If you convert part of your RRSP to a RRIF, Jackie, only the converted portion is subject to the minimum annual withdrawal. The balance of your RRSP account is not.

If you have multiple RRIF accounts, the minimum withdrawals are calculated independently for each account.

Once again, the minimum withdrawal applies only the year after opening your RRIF. There’s no minimum withdrawal in the initial year.

Confirming minimum withdrawals

Your financial institution is responsible for confirming your minimum withdrawal and making sure you take it each year. They should notify you early in the calendar year about the year-end value and the resulting minimum withdrawal based on your age.

The financial institution will generally give you the option to select the frequency of your withdrawals—such as annually, quarterly, monthly or otherwise—and whether you want optional income tax to be withheld.

As mentioned, there’s no required withholding tax on the minimum withdrawals. Amounts in excess of the minimum, should you take additional withdrawals, are subject to progressively higher withholding tax rates. But since the income is taxable, some RRIF account holders elect to have optional tax withheld in anticipation of the tax owing.

Many retirees end up owing tax each year, and after two years of owing more than $3,000 of tax ($1,800 for Quebec residents), the Canada Revenue Agency (CRA) will begin to request quarterly tax installments. These installments are prepayments of
expected tax owing based on your past two years of tax returns.

Final thoughts on RRIF withdrawals

In summary, Jackie, you don’t have to convert your RRSP to a RRIF to take a withdrawal from the account. There may, however, be tax advantages to RRIF withdrawals over RRSP withdrawals.

You can convert part of your RRSP to a RRIF, and while there is a deadline of December 31 of the year that you turn 71 to convert your accounts, you can choose to convert some or all of your RRSP ahead of time.

Minimum withdrawals are based on each RRIF account you have, and any RRSP accounts you have at the same time are excluded from that calculation. Your financial institution will confirm your minimum withdrawal annually, and provide different withdrawal options to you.

Read more about RRIF:

• Tax and estate planning for joint accounts
• Can you delay a RRIF withdrawal?
• RRSP to RRIF, and LIRA to LIF: How it all gets done
• OAS payment dates in 2025, and more to know about Old Age Security

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