How Can John, Who Must Convert His Rrsp To A Rrif At 71, Reduce Taxes If He Keeps Working?

Q. When I turned 71 years of age, I discovered that the Canadian government required me to transfer all my registered retirement savings plan (RRSP) funds into a registered retirement income fund (RRIF) — or annuity or lump sum — and then gradually withdraw money from it, which would be taxed. And I could no longer contribute to it.

I have been in full-time employment and have no intention of retiring in the near future. So, the sizable amount of money I must withdraw each year is taxed at a very high rate, contrary to the spirit of the purpose of an RRSP. I would prefer to continue contributing to it and not withdraw from it. Only my age disallows that. It is infuriating to see much of it gradually dwindle away in tax.

I feel this is government-imposed discrimination based solely on age, and therefore contrary to Section 15 of the Canadian Charter of Rights and Freedoms .

I am sure this must come up very often, especially now that people want to work longer and are able to. Is there any vehicle or recourse which can protect these funds until I really do retire, or defer such heavy taxation of them? —Cheers, John

FP Answers: Hi John. I hear you but those are the rules. Some time in the year you turn 71 you must convert your RRSP to a RRIF, purchase an annuity or withdraw your funds. Money drawn from your RRIF is taxable and added to your other taxable income and taxed accordingly. I am only going to answer the financial side of your question because I am not a lawyer.

You are not alone in your thinking, John. The Canadian Association of Retired Persons (CARP), the C.D. Howe Institute and other industry groups have argued for changes to RRIFs. Just to summarize, they have suggested pushing the RRIF conversion date to age 75 and reducing the minimum withdrawal requirement, or eliminating it all together.

There have been changes to the RRIF rules in the past. Pre-1992 RRIFs had to be depleted by age 90. In 1996 the RRIF conversion age went from age 71 to 69 then back to age 71 in 2007 and in 2015 the withdrawal factors were reduced by 30 per cent. So, there is hope for change, John, but probably not in time for you, so let’s look at some options.

At age 72 you will be drawing the minimum amount from your RRIF. The minimum is based on two factors: your age, and the value of your account January 1 of that year. At age 72 you must draw 5.4 per cent of the value of your account. This increases each year until you turn 95 and then the minimum withdrawal remains at 20 per cent for all future years. Now, how do you minimize the tax and manage Old Age Security (OAS) clawback?

The common strategies you are likely familiar with are pension splitting and basing your withdrawals on the younger spouse for a lower minimum withdrawal. Of course, you need a spouse for this to work.

Another spousal strategy you may not be as familiar with is contributing to a spousal RRSP before the year your spouse turns 72. As you continue working past age 72 you are earning RRSP contribution room. Although you are receiving taxable RRIF income you can make spousal RRSP contributions to offset or reduce the tax.

Have you ever heard of the advanced life deferred annuity (ALDA)? It may help you because you can transfer 25 per cent of your RRIF up to a maximum of $180,000 to an ALDA. For example, if you have a $720,000 RRIF you can transfer $180,000 to an ALDA and your minimum RRIF withdrawal at age 72 will reduce from $38,880 to $29,160, in effect lowering your taxable income by $9,720.

How does it work? You purchase a deferred annuity that begins payments at a date of your choosing anytime before the end of the year you turn 85. In your case, this would be when you think you will stop working. When you eventually die some of your investment may be returned to your beneficiaries. Talk to a financial planner before using this or the next strategy below.

This second strategy that may or may not be appropriate is a leveraged RRIF. You borrow money to purchase an income producing asset, such as investments or a rental property, and use RRIF income to fund the interest on the loan. The taxable RRIF income is offset by the interest tax deduction. This is for people who don’t need all of their RRIF income. On paper it always looks good but how many people at age 72 want to take on debt and the investment risk at this stage of their life?

That’s a brief overview of what’s available to you, John, to minimize taxes. Consult a good tax accountant and retirement financial planner to see more detailed scenarios for your specific situation.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.

Do you have a question for FP Answers? Email wealth@postmedia.com.

• How should Katie invest $30,000 she will need in six months?
• Once CPP disability benefits and an annuity following a car crash end at 65, should Anita switch to a TFSA and RRSP?