The article “What to do with U.S. dollar RRSPs in retirement” was originally published in MoneySense on June 5, 2023. Photo by Gustavo Fring from Pexels.
If you already have a Canadian dollar RRIF, should you roll the U.S. dollar RRSP into the RRIF, or open a U.S. dollar RRIF and keep the accounts separate?
“I am 70 and have already turned my RSP into a RIF. However, I also have a U.S. RSP which will need to be dealt with next year at the latest. What do I do with it? Roll it into my Canadian RIF within the next year? Leave it as a separate RIF and take the necessary money from each separately?
I was advised to open this separate RSP for my U.S. stock holdings in my Canadian RSP years ago. I am not sure what the advantage was or is—but now it has become a bit of a pain in the neck.” Liz
Is it worth combining U.S. and Canadian dollar RRIFs?
A registered retirement savings plan (RRSP) needs to be converted to a registered retirement income fund (RRIF) by no later than December 31 of the year you turn 71. But you do not have to convert the RRSP in its entirety. You can open the RRIF while maintaining a portion of your RRSP.
Some retirees will convert a portion of their RRSP to a RRIF for the tax advantages. With the pension income amount tax credit, at least $2,000 of withdrawals from a RRIF is tax-free (or close to it), and the bulk of your RRSP funds can be left intact.
As you have noted, Liz, you have to convert your RRSP account to a RRIF soon, given your age. The new RRIF and your existing RRIF need not be combined. If your brokerage allows you to have a U.S. dollar RRSP account, it probably also offers U.S. dollar RRIF accounts.
RRIF withdrawal rules
RRIFs have a minimum annual withdrawal requirement. It is a pre-determined percentage of your account balance as of December 31 of the previous year, and it increases each year as you age. If you convert your RRSP to a RRIF at 71, the minimum withdrawal in the subsequent year is 5.28% of the account value. RRIF minimums are calculated on an account-by-account basis, so you cannot take more out of one account in order to take less than the minimum out of another.
There are no maximum withdrawals for RRSPs or RRIFs, though practically speaking, cashing in your whole account is not generally advisable, given that withdrawals are fully taxable.
The same rules that apply to maintaining separate accounts and taking minimum withdrawals also apply to other registered retirement accounts, like locked-in RRSPs, Liz. The only two caveats are that locked-in RRSPs must be converted to a life income fund (LIF) or similar account (depends on the province) and there are maximum withdrawals each year that also depend on age, in addition to the annual minimum withdrawals.
The advantages of having a U.S. dollar RRSP or RRIF
The benefit of having a U.S. dollar RRSP or RRIF is you can buy U.S. investments with lower transaction costs than doing so with a Canadian dollar account. This is because you can hold U.S. dollar cash and avoid the need to convert Canadian dollars to U.S. dollars to buy a U.S. dollar investment; you can also avoid the need to have U.S. dollar proceeds converted to Canadian dollars upon sale. U.S. dividends that are not reinvested can accumulate in U.S. dollars instead of Canadian dollars. You can also take withdrawals in U.S. dollars, which may be helpful if you travel to the U.S.
Foreign exchange fees can be 1% to 2% at a brokerage. When buying or selling U.S. dollars in a U.S. dollar RRSP or RRIF, those fees are avoided, Liz.
Another option: Canadian Depository Receipts
If you cannot open a U.S. dollar account, one option for your existing RRIF is to consider Canadian Depositary Receipts (CDRs). CDRs allow you to buy foreign companies that trade on a Canadian stock exchange in Canadian dollars.
CDRs are currency-hedged, so changes in the exchange rate do not impact your investment value. In other words, let’s say you own Apple shares as a CDR on the NEO Exchange instead of buying them in U.S. dollars on the Nasdaq. If the U.S. shares rise 2%, your shares also rise 2%—regardless of how the U.S. dollar performs.
Although some investors may see this currency hedging as a benefit, I think it actually reduces portfolio diversification by tying all your returns back to Canadian dollars instead of holding different currencies.
Should you combine your Canadian and U.S. dollar RRIFs?
In summary, Liz, you can and probably should keep your U.S. dollar RRSP separate by converting it to a U.S. dollar RRIF account. But if you find it too much of a hassle to maintain multiple accounts, you could transfer the U.S. investments in kind (as is) on a tax-deferred basis to your Canadian dollar RRIF. Just be aware that you will have slightly higher costs to buy or sell investments or receive dividends due to foreign exchange fees thereafter.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.