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As people approach retirement, one of their biggest concerns is reducing taxes in their golden years. Strategic planning of how Registered Retirement Income Fund (RRIF) accounts are liquidated during retirement can be a great way to minimize taxes. 

In this article, we will explore how converting RRSP to RRIF accounts and withdrawing minimum annual payments can help retirees save significantly on taxes.

The RRIF Conversion Strategy: A Case Study

To illustrate the benefits of the RRIF conversion strategy, let’s consider the case of our client Sandra. A few years ago, Sandra turned 65 and was not yet required to convert her RRSP to a RRIF. However, we advised her to consider converting a portion of her RRSP to a RRIF and withdrawing a minimum annual payment of $2,000. This approach allowed Sandra to avoid withholding tax on her withdrawals, as the full $2,000 goes directly to her bank account.

Moreover, the annual payment of $2,000 is the amount of eligible pension income that can qualify for the Canadian Pension Income Tax Credit. This credit allows Sandra to reduce her tax payable on RRIF income by 15%. 

By implementing this strategy, Sandra was able to save $300 on $2,000 of income annually.

Seeing the benefits of this strategy, we decided to implement it not just for Sandra but also for her husband. Together, they were able to receive a combined total of $4,200 in tax credits over the next 7 years. However, before they turned 72, the age when RRIF withdrawals become mandatory, Sandra expressed a desire to receive more than the minimum $2,000 per year from her RRIF.

While it is possible to withdraw more than the minimum annual payment, it is important to note that any amount above this threshold is subject to withholding tax. For instance, if Sandra wanted to withdraw an additional $8,000 annually, she would have to pay $1,300 in withholding tax, reducing her net payment to $8,700.

To address Sandra’s desire for higher annual payments without any withholding tax, we advised her to move more of her RRSP into her RRIF account. 

By doing so, we were able to increase her minimum annual payment to $10,000, allowing Sandra to receive the full amount without any taxes being withheld.

By converting a portion of her RRSP to a RRIF account and withdrawing the minimum annual payment, Sandra was able to reduce her tax payable on her RRIF income by 15%. It also enabled her to receive the full amount of $10,000 annually without any taxes being withheld.

Maximizing RRIF payments by increasing the minimum annual payment can be an excellent strategy to save taxes during retirement. 

It is crucial for retirees to plan their RRIF withdrawals strategically, taking into account withholding taxes and the potential benefits of the Canadian Pension Income Tax Credit. With the guidance of financial advisors, retirees can make informed decisions about their RRIF accounts and implement strategies that align with their financial goals.

Reducing taxes in retirement is an important aspect of financial planning, and the RRIF conversion strategy provides a powerful tool to achieve this goal. By leveraging the tax advantages offered by RRIF accounts, retirees can enjoy a more tax-efficient retirement, ensuring their hard-earned savings last longer and provide the financial security they deserve.

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