Understanding The RRSP To RRIF Conversion

rrsp ref what's the difference a lot of you get confused and it comes across our plate in our office every single day so I thought I'd put together a video talking about rsp's riffs which is a retirement income fund when to convert from an rrsp to ref how it all works and give you Direction on what to do going forward my name is Adam welcome to the channel thanks for joining us as you know an rrsp or a retirement savings plan is one of the best if not the best tools to save for your retirement it's great tax savings it deferreds the growth over time and you just pay the tax when you pull the money out in retirement which is hopefully in a lower tax bracket it's a lot of confusion around when to convert an rrsp to a riff and as we build retirement plans one of the number of questions we get is Adam why and when do I convert my rrsp to a riff a retirement income fund so an rrsp is for savings it's while you're you know 18 up to whenever you retire to build that asset to save up to save up as soon as you flick the switch to start drawing income out of an RSP for retirement ideally you want to convert to a riff and I'll explain why here in a minute so if you think of it an rrsp is while you're saving a riff a retirement income fund is while you're drawing it out or drawing down that account now let's quickly touch on an RSP you can have as many rrsps as you want I don't recommend having too many because you might lose some of them and I'm not kidding you we have clients that will touch base with us years down the road after we've been working with them and say oh I just came across an old statement and sure enough they have 10 20 30 000 and it's typically from old work plans so if you have you know movement in your job and you move around quite a bit make sure you're always consolidating your rrsps into one so that you don't forget about one and trust me it happens all the time don't let that be you when you come to the point when you convert it to a riff you can have multiple riffs as well but Sim simplify your life make it easier on yourself get that down ideally to one but maybe two different riffs all that does is it creates more tax slips for you both while you're putting money in but on your Rift when you're drawing money out in retirement simplify your life have as many or have as few slips as you can and have as few riffs as you can one thing I want to bring up before you know as a blanket saying RSP to Rift draw out of retirement is if you're using a spousal rrsp just be aware of attribution rules if you've been contributing to spousal RSP all the way to the date that you retire you need to wait three years current year plus two years before you start drawing it out or there will be attribution tax back to you not to who you're trying to save that money for so just be aware of that if you're utilizing disposal RSP make sure you understand the rules of that before you start drawing money out of a spousal riff now comes the main question why do we want to utilize a riff over an rrsp there's a couple key reasons when you hit retirement if you just just leave your money in an rrsp and you start pulling money out of the rrsp there's going to be withholding taxes and there's going to be withholding tax from dollar one so if you pull out let's say twenty thousand dollars from your rrsp you're going to have a 30 withholding tax on the whole thing now that 30 withholding tax might be and probably is a much higher tax rate than what your average tax rate will be and thus it's going to generate a tax refund for you but what that means is that the government has your money in the meantime ideally we want to keep that in your pocket the second reason why pulling money out of an rrsp versus rif might not make sense for you is because most financial institutions charge a transaction fee or a withdrawal fee on pulling money out of an RSP because an rrsp is made for savings is a savings plan once you convert to a riff it's an income plan meaning that it's an account designed to pull money out if you're at most of the major institutions and you pull money out of an rrsp you're going to pay a 25 maybe a 50 dollar fee per transaction whereas if you just convert it to a riff which is done you know free of charge you can now start pulling those income draws out on a fee free basis now going back to the withholding tax so if we look at a situation where say a client has a hundred thousand dollar RSP and they need to start drawing money out of it let's assume the client needs to pull out ten thousand dollars this year if they pull ten thousand dollars out of a rrsp they're going to have withholding tax of 20 and just a refresher for all of you the withholding tax anything zero to five thousand dollars is a ten percent withholding tax anything from five thousand and one up to fifteen thousand is twenty percent and above fifteen thousand is thirty percent in Quebec is a little bit different there's a provincial and a federal we'll link that below as well if the client has a hundred thousand dollars and they need to pull out ten thousand if you leave it in the rrsp there's going to be a 20 percent withholding tax on the whole thing so there's going to be 2000 withheld 8 000 in your pocket and probably a 25 dollar transaction fee if we do the same process but before we pull money out of the rrsp we convert that rrsp into a riff let's say the client's 65 years old 100 000 are riff account at this point it's a four percent withholding minimum which means that they have to take out the minimum withdrawal amount is four percent or four thousand dollars in this case so if the client's going to take out ten thousand dollars the first four thousand dollars there's no withholding tax on the minimum Rift amount so the first four thousand client can take out absolutely tax free no withholding tax the next six thousand up to that ten thousand so the next six thousand has a 20 withholding tax and that's because it's between five thousand and fifteen thousand so it's the amount above the minimum that they look at for how much withholding tax is going to be withheld now that first four thousand that has no withholding tax it's still taxable income it's not tax free income but there's just no withholding tax on it so when we look at this picture we've converted it to a riff we've taken out ten thousand dollars there's been twenty percent withholding tax on the additional six thousand which means that only twelve hundred dollars is withheld for taxes or about twelve percent of the overall ten thousand dollar withdrawal so hopefully you follow along with that the first four thousand no withholding tax only above the minimum in this case four thousand dollars has that withholding tax very important because what happens is with that rrsp you're being withheld on the full amount which probably in retirement is much more tax than you need to pay and again I'm using maybe a smaller example if you're taking out twenty or thirty thousand dollars from an rrsp converting to a rip has that much more value you want to make sure that minimum amount you can avoid any withholding tax again when you work with your financial planner and put in a tax plan together hopefully they'll be able to show you what your average tax rate and total tax bill is so if your average tax rate is say 10 or 15 percent there's a lot of value in making sure that there's no withholding tax on the minimum because there's probably going to be at least 20 maybe 30 percent on the amount above the minimum on that Rift withdrawal so there's a couple more benefits to converting from an rrsp to a riff but first I want to thank our sponsor for this video passive passive is great for Passive investors new or established if you're managing your own investing passive is the tool it allows you to be a better investor you'll be more organized make good investment decisions and feel more confident in your portfolio passive makes it so 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tax-free if you leave that money in an rrsp it will not qualify for the pension income tax credit so if you're 65 or older and you're kind of on the fence like yeah Adam I don't really get this like should I convert to a riff leave it in rrsp you need to convert to a riff and take at least 2 000 out every single year 65 onwards because it's tax free money the last tip I have for all of you out there around rsps and riffs is this when you convert to riff you don't need to move a hundred percent of your rrsp over to the Riff so let's say you have a really big rrsp half a million dollars but you don't want to convert the whole thing to a riff because you might go back to work maybe the minimum amount you don't want to drive up too high there's multiple reasons that possibly you don't want to convert the whole thing to a riff well you can set up the Riff account and move only part of your RSP over so let's say you want to move a hundred thousand over but leave 400 000 in the rrsp account absolutely you're able to do that so it can be a partial conversion over to the Riff and remember you don't have to sell what you have in the rrsp and then re-buyd in the Riff it's basically think of it as an umbrella One Umbrella is titled rrsp the other umbrella is titled riff whatever you hold within the rrsp is just moved over as it is under that riff umbrella so hopefully that helps you make a better decision around RSP and riff As you move forward in your retirement

Channel: Parallel Wealth

Views: 72,174

Keywords: Financial Planning, Retirement Planning, Estate Planning, Retirement, Savings, Passive Income, RRSP, TFSA, Wealth, Parallel Wealth, rrsp to rrif

Id: iZ1IASsCqiI

Length: 10min 55sec (655 seconds)

Published: Tue Apr 25 2023