Updated: Sep 21, 2021
Like our accumulation years, where I learned a lot real early and had a few panic attacks, setting up our decumulation years is proving very similar. Initially, I was looking at everything including non-taxable income e.g. TFSAs, and over-complicating my income source plan. But I quickly realized, for the purpose of calculating annual income and building a sustainable tax plan, you need to only consider “taxable income” and build a plan based on these amounts that is levelled to both your needs and your own time horizon for depletion. TFSAs, not being taxed at all, will not be considered in the income calculations below, though obviously they may provide another source of (tax-free) income if you want or need it to be part of the equation.
We had a few options at the time of our retirement to provide income from tax-deferred sources. These included our RRSP (Registered Retirement Savings Plan) and LIRAs (Locked-in Retirement Account aka RPP or registered pension plan from companies I worked for in the past). Being that I was 57 and my wife 52 when we retired, we could have left all our funds in RRSPs (at age 71 they must be converted to RIFs) and made periodic or lump sum withdrawals to meet our annual income needs. Or, we could convert our RRSPs to RIFs (Retirement Income Funds) to fully unlock the funds for monthly withdrawals at either the minimum or maximum election rates, and/or make lump sum withdrawals. You can also unlock a portion of your RRSP and transfer to a RIF, leaving funds accessible by both plans. You can move money from RRSP to a RIF, but not the other way. For LIRAs, you need to convert them to LIFs (Lifetime Income Funds) or Annuities to unlock them for withdrawal, and you cannot make any withdrawals other than the min-max rates prescribed. All these accounts have uniqueness resulting in some differences which I’ll try my best to summarize (to my knowledge). This will/may not be a comprehensive summary of these options, and you should still research them individually and/or get advice before making your decisions. PS - again I am not a financial professional or advisor and only share my own experience and understanding of these products.
Keeping RRSPs as RRSPs and withdrawing as required:
- CRA taxes your withdrawals based on the annual, cumulative amounts.
- There is no limit on your withdrawal amounts.
- Withholding tax is applied, and remitted by your financial institution, to the withdrawals per the withdrawal table below.
- You must convert all RRSPs to RIFs in the year you turn 71 (regardless).
- Keeps RRSP accounts open and active for regular contributions and tax sheltering.
- The pension income credit of $2k per person is not available with RRSP withdrawals.
Converting RRSPs to RIFs and setting up monthly elections:
- Once RIFs are opened, you must withdraw the minimum amounts annually. You have the option to set the minimums in monthly payments ( called elections), or take the minimums in periodic or annual lump sum withdrawals. Once elections are set up they cannot be reversed, only adjusted between min and max rates allowed by your age.
- If you set up your monthly elections at the minimum rate, no tax witholding tax is applied to these amounts by your financial institution. If you take maximum, tax will be applied and remitted.
- Withholding tax is applied, and remitted, to elections if set at the maximum rate, and any lump sum withdrawals made per the withdrawal table below.
- When setting up your RIFs, you have the one-time option to set the withdrawal rates to the younger spouses age.
- Can set up either monthly minimum or maximum withdrawals per the published CRA election schedules but nothing inbetween. However, remember if you take more than minimum amounts you will pay tax on your elections. You can switch between the min and max rates whenever you want.
- You can still make unrestricted lump sum withdrawals through year to meet your income goals. There is no limit on withdrawal amounts.
- If you have not set up minimum elections, the minimum annual amounts are subtracted from your cumulative annual withdrawals for the purpose of calculating withholding tax. For example, if your minimum RIF withdrawal based on your age and RIF value is $11,440, and you withdraw $30,000 for the year, and have not taken the minimums out in monthly payments, then you are assessed withholding tax on $30,000 - $11,440 = $18,560. You will therefore pay 30% withholding tax on the $18,560 as it is greater than $15k, or $5568 in tax.
- You can only split RIF income upon reaching the age of 65.
- The pension income credit of $2k p/p is available to use against RIF income at age 65, as RIF income qualifies as pension income at this point. This point alone may justify setting up your RIFs early, even if you just transfer A small amount into them from your RRSP.
- Setting up RIFs early means you do not need to worry about setting these up later.
TAX WITHHOLDING RATES ON RRIF WITHDRAWALS
Converting a portion of RRSPs to RIFs:
- Allows benefits of both RRSPs and RIFs to be recognized.
- Keeps RRSP accounts open for regular contributions.
- you can fund the RIF account annually with whatever value works for you.
- You can only split RIF income when you reach the age of 65.
- The pension income credit of $2k p/p is available to use against RIF income at age 65, as RIF income qualifies as pension income. This point alone may justify setting up RIFs early.
- Setting up RIFs early means you do not need to worry about setting these up later.
Converting LIRAs to LIFS
- Generally, you can unlock a LIRA for retirement income once you reach age 55. There are some exceptions allowing earlier access including non-residency, financial hardship, or various health reasons.
- If your LIRAs are held in some provinces (e.g. Alberta is one, BC is not), you can transfer 50% of your LIRA to your RRSP when you unlock them, however you only get one opportunity to do this at time of the application and transfer to a LIF.
- LIFs are an RPP (registered pension plan), therefore income taken qualifies for income splitting immediately (unlike RIFs which cannot be split until year you turn 65).
- Allows income to be drawn in the form of min-max amounts relative to your age only. Unlike RIFs, they cannot be set to younger spouses age.
- LIF election income is treated similar to RIF election income for tax purposes, in that minimum elections are not taxed and remitted by your financial institution. Maximum elections will be taxed and remitted.
- You can only elect to take minimum or maximum rate.
- You cannot take lump sum withdrawals from LIFs. They are designed to last your whole life.
Use LIRA funds to purchase an Annuity
- If your LIRAs are held in some provinces (Alberta is one), you can transfer 50% of your LIRA to your RRSP when you unlock them, however you only get one opportunity to do this at time of trnsferring to an annuity.
- Similar to a LIF, but an insured (insurance product).
- Insured against a loss of original value.
- Significantly higher fees for the insurance, and less growth as a result, may not keep pace with inflation or market indices.
- Designed to pay you a guaranteed fixed annual sum for rest of your life.
- The amounts withdrawn are taxed as income.
- Withdrawing lump sums from annuities will be penalized by providers, in cases up to 10%.
- Annuities can be very complex. Personally, I’m not a fan of these products.
When we retired I decided to unlock all our (my and my wife’s) registered accounts including our personal RRSPs which we converted to RIFs, my LIRAs (Locked-In Retirement Allowance) which I converted to LIFs (Lifetime Income Funds), and set them all up for minimum elections and monthly payments. PS “elections“ is the CRA terminology for the % withdrawal rates you are allowed under CRA rules based on your age. You can set this amount up to be withdrawn annually with your provider or account broker. The younger you are, the lower the min/max election %. You can either withdraw the minimum or the maximum %, but cannot set amounts inbetween. With LIFs, you cannot make lump sum withdrawals and can only take the elections based on your own age. With RIFs, if your spouse is younger than you, you have the one-time option to set all RIF elections (yours’ and your spouse’s) to the younger spouse’s age. I did this. The main reason I did this is I wanted our RIF dividend income to be greater than the elections being withdrawn for as long as possible so they were self-funding. In this scenario I wouldn’t be forced to cash in shares below ACBs to fund the monthly elections for at least 10 years. I could pick the sweet spots for cashing in shares. Also, as they were set to minimums, I could defer paying taxes on the elections until my taxes are filed. Below is an example rate chart for RIF/LIF withdrawals based on ages and jurisdiction. Wherever you hold your accounts will have these rates available, and be able to provide information and advice to you on your options. They may and have changed, so need to be checked annually.
Far in advance of setting up our retirement income, we set up our RIFs and my LIFs, then fully transferred all our funds over from our RRSP and my BC and AB LIRA accounts, as we both had no intention of going back to work and were committed to begin withdrawing funds to support our retirement income goals. We did all this 7 months prior to starting any withdrawals and this proved to be a good thing, because it took nearly all 7 months to do the paperwork, process the transfers, and set up the monthly payments, and that was with our personal Bank Advisor’s help. I also took advantage of the one-time opportunity to move 50% of my Alberta LIRA into my personal RRSP, to give me more control over more of my money. To reiterate, I set up all our RIFs and LIFs to withdraw monthly at the minimum elections, based on CRA withdrawal rate schedule (above) and set the RIFs to my wife’s age (4 years younger than me). This allowed us to realize a steady monthly income for the year from both my RIFs and LIFs that was more than supplemented from the monthly dividends we were receiving from our investments. As the RIFs were set to my wife’s younger age (lower withdrawal rate), the time horizon for the dividends covering the elections is much longer. Because I unlocked my LIRAs to LIFs I was able to split this RPP income immediately and will be able to claim the $2k pension credit towards both our incomes. The LIF value originates from a LIRA/RPP (registered pension plan) from previous companies I worked for, and therefore qualifies as pension income. RIF income also qualifies as pension income towards the pension tax credit, but can only be split between spouses upon the holder reaching age 65. So, at the end, we had direct, gross income coming in from personal RIFs, my LIFs, plus a joint taxable investment account which was all fixed and predictable. We set a gross dollar income goal for the year. This gross income goal, minus our RIF, LIF, and non-registered Joint Investment account income equals a value we have to take out in a lump sum during the year to meet our gross income goal.
For tax efficiency you will want to understand what income can be split at what age, and split this income between you and your spouse as evenly as possible. This allows you to take a higher combined income while keeping the amounts in the lowest, practical tax bracket. For instance, if you can split your incomes so that it is equal to or less than $48,535/yr each and benefit from all the available tax credits, your year-end income tax will be in the lowest tier at approximately 15%. To do this you need an income splitting plan and strategy. The LIF (pension) and the Joint non-registered investment account income is easy enough to split. CRA income splitting rules allows you to split these income amounts between partners 50/50 at any age. But note, if you have non-registered investment accounts you may want double-check and ensure these are set up as a joint accounts, which allows you to split these amounts evenly. If they are not joint accounts, they income/tax will be assessed in the account holder's hands. If you’ve set up elections on your RIFs you will need to do a bit of simple math to determine your income from these. Your income from your RIFs is simply the factors relative to the age they are set to times the value of your RIF account on Dec 31. On Dec 31 of every year is when the RIF value gets locked in for the purpose of calculating your elections and minimum withdrawals. You can also get this value from your RIF provider or brokerage, or find it in your account details. For example, if your income goal is a combined (husband and wife) $97,070 gross per year to stay in lowest bracket, withdrawing minimum elections, and splitting income evenly at $48,535 between spouses, below is a simple respresentation of possible income strategy and taxes for one year. PS I am biased towards self-managing my income and have all my accounts set up in an online brokerage with my bank.
Personally, we have set our retirement income plan similar to this, though we have different account values and decided to take a bit more gross, split income from our RIFs. With this approach we pay a little more tax early-on in our retirement plan with the goal of getting our registered accounts drawn down faster, plus adequately fund our early go-go retirement years. We also don’t want to scrimp on early retirement income only to make too much after age 65, which has the real potential to trigger OAS clawbacks. I feel it’s better to get it out of registered accounts faster and into TFSAs or non-registered accounts earlier rather than later, even if we pay marginally higher tax, to avoid the potentially hefty estate taxes which could easily take half of your savings to taxes. They say you need to repeat something 3x for it to stick, so here it goes again. I set my LIFs and our RIF accounts to the minimum elections so we could collect a monthly, tax-free, paycheque through the year. I also decided set up our RIF elections to my wife’s younger age, allowing us to reduce the withdrawal rates well below the investment accounts’ dividend yield rates til I’m 69. At my age of 69 and my wife’s age of 65 we will reach the 4% crossover point where RIF withdrawal rates are no longer covered by investment dividend rates. This gives us stable, monthly, sufficient-to-cover-fixed-expenses, tax-free income (til tax time), and stretched out the timeline to ~10 years where our dividends alone will cover our election withdrawals. By withdrawing the minimum elections we avoid up-front taxation on these amounts, and we can still take out lump sum withdrawals (subject to withholding tax) during the year to balance our annual income goals and overall taxes. We are only taxed on the lump sum withdrawals in excess of the annual minimum amounts according to the withdrawal table above. When we each turn 65 we can start splitting our personal RIF income, which will provide greater income-splitting optionality as my RIF is larger than my wife’s. We also plan to defer CPP and OAS til 65+. Deferring CPP and OAS will increase the future payments from these plans by +30-60% while allowing us to draw down registered accounts faster without this additional source of taxable income streaming in. CPP and OAS payments are indexed to inflation, making them a nice future source of income. Leaving them alone as long as possible makes sense, if you can. CPP income can be split by annual election to the CRA, but OAS cannot. There are a lot of options for setting up and splitting your retirement income. You need to take stock of all taxable income sources, come up with a withdrawal plan under the different ages and provincial rules, time your CPP/OAS appropriately to your plans, and minimize your taxes using the available income splitting options. Do all with the ultimate goal of meeting your annual income targets over your retirement time horizon. Everyone’s plan is as different as their own personall needs and the values in their various accounts, the types of assets and income they have at their disposal, the various age and provincial rules for accessing their registered accounts for income, and the length of time they will need these sources to provide income.