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The Registered Retirement Income Fund (RRIF) Tax Bomb
Many people understand the fundamental basics of how an RRSP reduces taxable income when contributed to, and that investment losses or gains are tax neutral due to its sheltering status.
General understanding starts to falter when the RRSP must convert to a RRIF “Registered Retirement Income Fund”.
A RRIF is the opposite of an RRSP. You are required by law to withdraw money from this account. By the end of the year in which you turn age 71, you must convert your RRSP to a RRIF.
The amount you must take out is based on the market value of the account on Dec 31 of the year previous (2022). The percentage you must withdraw is based on your age, but you can use your spouse’s age if younger. Currently, at age 71, you must take out 5.28%.
Lump sums are terrible ideas for those that will be overwhelmed with the amount and may in fact inadvertently abuse the financial gift.
The RRSP to RRIF account transfer is an exceedingly simple process. The Certified Financial Planner (CFP) will prepare a handful of forms that their client needs to sign. Together the planner and client decide how often the client would like to receive their income from the RRIF. It can be monthly to annually and anywhere in between. The financial institution makes the transfer and voilà, it’s done.
It is important to understand that when the money comes out of your new RRIF, it is now taxable income. For all years that you benefitted with tax-sheltered growth, you will now draw money from the RRIF and pay tax on it. If you overstuffed your RRSP, have a solid employer pension income, are collecting CPP or are still working, you may find yourself in a higher tax bracket than you were in years past.
RRIFs do not transfer tax-free to the next generation. The CRA will tax away upwards of half of the value of an RRSP/RRIF if the beneficiary is not the spouse. This is a huge issue for singles and widows/ers.
If your RRSP or RRIF is in the $500,000 range, you have a tax bomb. You need to be proactive now so that the CRA doesn’t strip away your legacy.
Please reach out if you have questions on how to manage this risk. At Tayler Insurance & Estate Planning our solutions are simple and tax efficient. We help retirees grow their wealth and plan to protect their legacy.
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