At this time of year when there is always a lot of ink being written about the tax efficiency of contributions to RRSPs (registered retirement savings plans) for working individuals, retirees often feel more concerned by the questions surrounding RRIFs (Registered Retirement Income Funds) and disbursement strategies. Some people wonder if they should contribute to an RRSP even after retirement. Others, on the contrary, question the relevance of converting their RRSP into a RRIF before the mandatory age of 71.
Since it is possible to contribute to the RRSP until December 31 of the year you turn 71 and this is the deadline to convert your RRSP to a RRIF, these questions may seem poles apart from one of the other. But between the ages of 55 and 71, there is a range of possible personal situations that might justify doing both. Or to do neither.
Contribute to the RRSP, even in retirement?
Before establishing whether any strategy is relevant, let’s remember that even if you no longer receive salary income or self-employment income from full-time employment, it is not impossible that contribution room remains unused. This information can be found in the federal notice of assessment.
In addition, it is not uncommon for retirees to continue, without realizing it, to earn income giving them new contribution rights to their RRSP, over several years of employment retirement. The most common example is rental income, which is included in the earned income from which these rights are determined. It can also be the few hours worked or occasional mandates that retirees carry out for motivations other than financial.
Continuing to accumulate contribution room does not mean that the contribution must absolutely be made every year. This decision should be based on various factors and will depend on current and future tax rates, as well as short- and long-term cash flow needs to fund retirement.
For example, if you have significant income from a retirement plan, which is taxable, you could reduce the taxes paid in the short term through new contributions. Let’s also think about retirees whose significant unregistered investment income or dividends paid by their holding companies are taxed. In such cases, contributing to an RRSP, even in retirement, must be considered. And the spousal RRSP should be favored by couples with a significant income gap in order to improve their income splitting strategy.
Retirees are often hesitant to contribute to their RRSP, thinking that future withdrawals will be taxable. It is true that, in certain cases where the accumulated RRSPs are less significant, it may be more advantageous to disburse them as a priority in order to allow, in particular, the postponement of benefits from the Régie des rentes du Québec and the security pension. old age.
The key here is therefore to carry out an analysis which takes into account the marginal effective tax rate, which focuses on the impacts of contributions on all social tax programs.
When to switch to a RRIF?
It is possible to open a RRIF account from the age of 55. In the majority of cases where already taxable income (non-registered investments, tax-free savings account disbursement, rental or holding company income) is high, this moment will be postponed to age 71.
Unlike RRSPs, whose withdrawals are absolutely discretionary and flexible, withdrawals from a RRIF are regulated with mandatory minimum payments. In these cases, converting it to a RRIF too young literally means being taxed on amounts not required to pay the cost of living. In other situations, if the RRSP is the main retirement income, the advantage of converting it into a RRIF will be to allow income splitting between spouses. Withdrawals from a RRIF are in fact considered retirement income, which is not the case for withdrawals from an RRSP.
From age 65, in certain cases, there is another favorable opportunity: retirees who do not benefit from eligible pension income (such as a pension plan or annuity) should open a RRIF account and transfer a part of their RRSP, thus allowing them to withdraw an amount of $2,000. This is the minimum amount qualifying for the federal pension income tax credit. If you are a couple and you have a significant difference in your tax rates, you can even split this annuity income to further increase the profitability of the tax credit.
An ordered retirement plan
This means that it could both be strategic to contribute to the RRSP for certain years of retirement, but also to transform part of your RRSP into a RRIF. This is further proof that, when it comes to taxation, comparing yourself to friends or applying uniform revenues is not possible. This piecemeal information is just as useful and relevant as it is incomplete.
A retirement disbursement plan that takes into account your objectives, your needs and your priorities therefore remains the best strategy to adopt to level out your taxable income over time.
Because if the strategies during the asset accumulation phase allow you to enrich yourself, those during the period of financial independence or retirement allow you to optimize assets, thus giving you more security and flexibility in the event of unforeseen.