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Senior Living: Strategies for RRIFs

Cash withdrawals should be discretionary — you have options.

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Many people are heading into the balance of the year and realizing they must take the minimum withdrawal from their RRIF if they haven’t done so earlier. Some Canadians may not need these funds but are encouraged by their advisers to make cash withdrawals regardless of market conditions. It still surprises me that some advisers still don’t realize the basic estate-planning tricks to help their clients save money.

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Canadians actually do not have to cash in their investments from an RIF. Instead, you can choose an in-kind transfer to a non-registered account, which is a great help if the market conditions are unfavourable for cash withdrawals. You will still have to pay the tax on the market value of the securities that you essentially “withdraw,” (but actually, transfer), however you would not have to sell them at an unrecoverable loss at that time.

When the value of the securities eventually recovers, or you decide that you are now ready to cash them out, any increased growth in the non-registered account will be treated as a capital gain, outside of your RIF and taxed at half the rate normally applied to a regular RIF withdrawal. You will not be double taxed as many clients seem to believe.

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If you have room, you could also do an “in-kind” transfer to your TFSA (tax free savings account). This would be a great way to continue market growth that will be sheltered from any future taxation.

As you age, you will want to make sure that you either transfer out funds from your RIF or use them before you die. Most retirees believe to reasonably reduce the taxation to their retirement income they should choose to take the minimum amount from a RIF; however, if you pass away before withdrawing all the funds, you will ultimately forfeit most of your investment savings to taxation.

Unless you can transfer your registered investment portfolio to a surviving spouse or dependent child, you will not be sheltered from estate taxes that will be due immediately upon your death. To lower annual taxation on withdrawals, those who are over 65 can split up to 50 per cent of your RRIF income with a spouse and both will still be entitled to the pension tax credit.

No matter what your age, whether you are in retirement or nowhere near it, it’s always a good idea to assess your investment situation annually. Your goal should be to save wisely and choose products that will provide inflation adjusted income to always deliver returns above inflation.

— Christine Ibbotson has written four finance books, including the bestseller How to Retire Debt Free & Wealthy. She also writes the Moneylady column. askthemoneylady.ca

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