RRSP to RRIF, and LIRA to LIF: how it’s all done

Using a Self-Directed RRIF (and Planning for Taxes)

The new investment vehicle bears a name that will sound familiar to those with self-directed RRSPs: a self-directed RRIF. At our bank, it was simply a matter of checking the RRSP online and finding the link to convert it to a self-directed RRIF. Once there, I checked the boxes to choose when I want the money, the withdrawal frequency, and (optionally) a tax withholding percentage. If your spouse is younger than you, you can also specify that your withdrawals are based on your spouse’s age.

Birenbaum says retirees often don’t report withholding taxes because there is no minimum withholding tax required on the minimum withdrawal. I imagine Ruth and I will ask to have 30% tax deducted at the time of each withdrawal, which we do with existing retirement income. It is on the high side to compensate for the fact that we also have taxable investment income (usually dividends). not taxed at source.

For example, say you have a RRIF of $100,000 and withdraw $5,500 next year. If that’s all you take, you don’t to have to have the withholding tax withheld. But if you have other sources of income (like most Canadian retirees), you know there will be some tax liability when it comes time to file taxes. So it makes sense to voluntarily withhold taxes so that you don’t face a big tax surprise later.

Birenbaum suggests doing the calculations and putting money in a high-interest account, then paying the Canada Revenue Agency (CRA) when taxes are due.

If you don’t do this, the CRA may at some point require you to make quarterly tax payments. “I find that the majority of retirees like to have their tax withheld at source so they don’t have to deal with payments and debts to the CRA,” Birenbaum says. You can of course have more than 30% withheld.

What is an annuity?

An annuity is a financial product that provides the buyer with a guaranteed income stream at fixed intervals, usually monthly, quarterly, semi-annually or annually. Annuities are available from insurance companies, agents and brokers.

Read the full definition from the MoneySense glossary: ​​What is an annuity?

How to switch from a LIRA to an annuity

With a LIRA, you must liquidate the account before the money is sent to the insurance company for annuitization. This means you need to keep an eye on the expiration dates of guaranteed investment certificates (GICs) or other fixed income securities.

Ideally, you expected this years ago, and everything becomes redeemable in the year you start your LIF. But in the real world this doesn’t always happen. In our case, we wanted to annuitize a round number (like $50,000 or $100,000) and put the rest into a RRIF until it’s ready to be added to the annuity.

The same goes for stocks or exchange-traded funds (ETFs). Ideally, you won’t sell at a significant loss. In the case of our LIRA, this could be postponed until the end of 2025, with the first payments starting in 2026. But we’ll probably start sooner, just to get used to the process and see the tax implications.

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