The article “RRSP Withdrawals In Your 40’s” was originally published on MoneySense on October 3, 2017.
Converting to a RRIF might be more trouble than it’s worth
Q: I’m a federal government employee and was thinking about take some time and using my RRSPs to live on during that time (1 year). My bank said I could turn my RRSPs into a RRIF and withdraw monthly from that for income. I’m only 40. Is this possible? I’ve read online that you must be at least 65 to withdraw from a RRIF.
—CL
A: You can certainly take Registered Retirement Savings Plan (RRSP) withdrawals to fund your leave, CL, subject to a few conditions.
First, if your RRSP is just a regular, personal RRSP account, there should be no limitations. You can take withdrawals at any point regardless of your age. Your online research is incorrect.
If it’s a locked-in RRSP that has come from a pension plan transfer, the locked-in status should prevent you from taking withdrawals prior to age 55 unless you have financial hardship or a shortened life expectancy. Presumably, neither is the case as your leave sounds voluntary.
If your RRSP is a spousal RRSP, CL, where your spouse has made contributions to an account in your name, keep in mind that if they have made contributions in the year of withdrawal or the previous two years, that withdrawal will be attributed back to your spouse. This means it would be taxed on their tax return instead of yours.
A Registered Retirement Income Fund (RRIF) is an account that is usually opened by retirees when they want to start taking RRSP withdrawals. Most retirees would convert their RRSP to a RRIF by age 71, which is the latest age you can still have an RRSP. You can convert your RRSP to a RRIF at any age though. There are minimum RRIF withdrawals required each year thereafter based on your age or your spouse’s age (you can elect to use either). Withdrawal rates rise as you get older. But you don’t have to convert your RRSP to a RRIF to take a withdrawal, CL.
An RRSP withdrawal has tax withheld at source. There is 10% tax on a withdrawal of up to $5,000; 20% tax on a withdrawal of between $5,001 and $15,000; and 30% tax on a withdrawal of more than $15,000. If you’re a Quebec resident, those rates are 21%, 26% and 31%.
Keep in mind that taking small withdrawals of $5,000 or less is only a short-term tax strategy. You might keep your withholding tax down, but your ultimate tax for your RRSP withdrawals will be based on your income for the year. When you file your tax return, you will claim all income sources, including your RRSP withdrawals, paying tax accordingly. Any withholding tax will be credited against your tax payable, but you may owe additional tax when you file your tax return beyond what was withheld.
If you are planning on taking an RRSP withdrawal and you are under the age of 65 and don’t plan to take regular withdrawals for the rest of your life, I would avoid converting your RRSP to a RRIF. If you do convert it, you will have to prepare paperwork to switch your account, plus you will then have to take withdrawals every year that your RRIF is open. You can change your mind and convert a RRIF back to an RRSP, but that requires more paperwork. You might as well just take your RRSP withdrawals as needed. RRIFs should be for retirees, not leaves of absence.
You have a lot of other items to consider as a federal employee during your leave, CL. Your pension plan may allow you to include your leave as part of your pensionable service and make pension contributions. You may have a choice as to whether you continue to pay for health insurance coverage and maintain it during your leave. You should consider your group and private disability insurance coverage to see what happens if you are disabled while on your leave. You may want to consider critical illness insurance if you don’t already have it. And if you plan to be travelling abroad, make sure you have valid group or private travel medical insurance coverage.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
