Did you know that almost half of the savings you have built up in your RRSP/RRIF (Registered Retirement Savings Plan/Registered Retirement Income Fund) could wind up being paid out in Tax at death.
Tax free transfers to a surviving spouse will delay the inevitable, but won’t avoid it.
First of all, let’s start at retirement.
Say you have an RRSP you have been contributing to for years as you worked, or possibly, as your spouse worked (these contributions could have gone into a spousal plan for you).
You can convert to a RRIF at the same time as you retire, but, you are not obligated to until the year that you turn 71.
You can hold your RRSP until it is mandatory to convert, or, you can convert to a RRIF and start drawing income immediately.
Once you convert your RRSP to a RRIF, the government has minimum dollar amounts that you have to withdraw every base – based on the amount of your portfolio and your age on Jan 1 annually.
There is no maximum to the withdrawal, but every dollar you withdraw will have to be added to your income for that year.
Certain types of income plans such as LIFs (Life Income Plans do have a maximum that you can withdraw annually, we will discuss these in a future article).
If you withdraw the minimum amount from the RRIF – monthly, semi-annually, quarterly or annually, no with-holding tax is taken from the withdrawal amount.
Any amount over the minimum amount is subject to with-holding tax immediately – 10% up to $5000.
Your financial institution will collect this tax and forward to CRA on your behalf. You may get some of these funds back at tax time, depending on your overall tax return and income.
There are a couple of things you can do to lessen the tax burden upon death.
Maximize your RRIF withdrawal annually – if you are in-between tax brackets, or have a low income year, withdraw enough from your RRIF to take you to the top of that bracket. Take the excess funds and invest in your TFSA (Tax Free Savings Account) if you have the contribution room.
Having a separate pot of funds that can be used for unexpected expenses without having to add the funds to your income is beneficial.
In addition to having the funds for your and your spouses’ lifetime, you need to decide if you want your beneficiaries to get the benefit of your life savings instead of the government as tax. This RRIF protection involves buying a life insurance policy to cover the tax bill at death. The premiums you pay are far lower than the eventual payout.
Contact Carol is you would like more information on RRIFs or with a subject you would like covered in a future article.
Carol Plaisier, AMP, Mortgage specialist with Invis, can be reached at the HollisWealth office in Parksville (250) 248-5997, or carolplaisier@invis.ca Website: www.carolplaisier.com
See all articles by Carol Plaisier