RRSP to RRIF, and LIRA to LIF: How it all gets done

How to use a self-directed RRIF (and plan 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 a simple matter of checking the RRSP online and finding the link to convert it to a self-directed RRIF. Once there, I ticked the boxes to choose when I want the money, the withdrawal frequency and (optionally) a tax withholding rate. If your spouse is younger than you are, you can also specify that your withdrawals will be based on your spouse’s age.

Birenbaum says retirees often fail to specify withholding tax because there is no minimum withholding tax required on the minimum withdrawal. I imagine Ruth and I will ask to have 30% tax taken out at the time of each withdrawal, which is what we do with existing pension income. It’s on the high side to make up for the fact that we also have taxable investment income (mostly dividends) that is not taxed at source.

As an example, say you have a $100,000 RRIF and you take out $5,500 next year. If that’s all you take, you don’t have to have withholding tax taken off. But if you have other income sources (as most Canadian retirees do), you know there will be some tax liability come tax filing time. So, it makes sense to voluntarily withhold taxes so you don’t have a big tax surprise down the road. 

Birenbaum suggests doing the math and setting aside funds 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, ask that you make quarterly tax installments. “I find the majority of retirees like having that withholding tax held at source so they don’t have to deal with installments and owing the CRA,” says Birenbaum. You can, of course, have more than 30% withheld.

How to change from a LIRA to an annuity

With a LIRA, you need to get the account liquid before the money is sent to the insurance company to annuitize. This means keeping tabs on the maturity dates of guaranteed investment certificates (GICs) or other fixed income.

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

It’s the same with stocks or equity exchange-traded funds (ETFs). Ideally, you don’t sell at a significant loss. In the case of our LIRA, this can be deferred to the end of 2025, with initial payments starting in 2026. But we will probably start sooner just to get used to the process and see the tax consequences.