Q: Hi 5i
You recently answered this question from Steve:
Recently a couple of younger friends (mid-60's)have just converted their RRSPs to RRIFs. Except for the possibility of needing the cash flow, I can't understand why they would want to convert to a RRIF.
Am I missing something? Are there advantages to converting early?
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Another reason his friends may be doing this is long term tax planning. Quick example, a couple in their mid 60s each has 500k in RSPs. If they were to both die suddenly that $1 million all gets reported as income on one return and most of it is taxed at over 40% (in BC the amount over $241k is 53.50%). To avoid this, the couple would need to live long lives and gradually draw the money out. But because none of us know when our time is up, they could take some out now in the 20% or 28.2% tax brackets (BC rates). The winners will be the kids and grandkids, the loser will be CRA. So by taking money out before 71, they are increasing the years when they can take money out at less than 30%, and reducing the potential giant tax bill at the end. And if they have not fully funded their TFSAs, they can use this money to top them up. Then going forward their interest, divs and cap gains aren't taxed. In the RSP or RIF, they will be taxed on all 3 when they take it out.
Greg
You recently answered this question from Steve:
Recently a couple of younger friends (mid-60's)have just converted their RRSPs to RRIFs. Except for the possibility of needing the cash flow, I can't understand why they would want to convert to a RRIF.
Am I missing something? Are there advantages to converting early?
~~~~~~~~~~~~~~~~~~~~~~
Another reason his friends may be doing this is long term tax planning. Quick example, a couple in their mid 60s each has 500k in RSPs. If they were to both die suddenly that $1 million all gets reported as income on one return and most of it is taxed at over 40% (in BC the amount over $241k is 53.50%). To avoid this, the couple would need to live long lives and gradually draw the money out. But because none of us know when our time is up, they could take some out now in the 20% or 28.2% tax brackets (BC rates). The winners will be the kids and grandkids, the loser will be CRA. So by taking money out before 71, they are increasing the years when they can take money out at less than 30%, and reducing the potential giant tax bill at the end. And if they have not fully funded their TFSAs, they can use this money to top them up. Then going forward their interest, divs and cap gains aren't taxed. In the RSP or RIF, they will be taxed on all 3 when they take it out.
Greg
5i Research Answer:
Thanks, this link also has more information on the topic: https://www.taxtips.ca/rrsp/converting-your-rrsp-to-a-rrif.htm
In a lot of cases, it also does seem to come down to a personal decision around the idea of does someone want to maximize/optimize the money or do they just want to ensure that they get to enjoy it on their own terms (and maybe get a little less because of it).