# RIFF for pension income tax credit



## Guest (Dec 29, 2010)

I'll be down to the co-op next week to set this up, in the meantime someone may have some useful info. I plan to work who knows how long past 65 ( coming up in 2011) ... and being cheap, er frugal, ok ... in favor of minmizing tax ... I'm setting up a RIFF to pay me $2K/yr while working to take advantage of the pension income tax credit of $2K.

Question: does anyone know, can a $2K RIFF be had that pays out $2K ... that is, can I set up a $2K RIFF and withdraw the $2K in the same year ... and thus take advantage of the tax credit on a year-to-year basis?

Thanks


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## Guest (Dec 29, 2010)

Oops ... RRIF ... info ...http://www.taxtips.ca/filing/pensiontaxcredit/eligibleincome.htm


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## Guest (Dec 29, 2010)

Had some time to go browsing ... my understanding, a RIF is a one time event to which no further contributions can be made so I'll have to give this some thought. I might convert my current self-directed RSP to a self-directed RIF this year to withdraw the $2K/yr for the credit while still working which could be 2 to 5 years. And also start up a new RSP to defer tax; that RSP could not be converted to a RIF. Ok, so, how do I cancel this thread?


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## warp (Sep 4, 2010)

All this bullsh*t just shows how ridiculous our tax system is , and how it needs a complete and utter overhaul.

Heres my take on the situation

You can open a RRIF by transferring $14,000 from your RRSP in the year you turn 65

You then take out $2000 a year for 7 years ( 65 to 71 inclusive)

You use the "pension income deduction" of $2000 each year so you will pay no federal tax on it......( you may pay a bit of provincial taxes on it but its still worth doing)

At age 71 you convert whats in your RRSP into that RRIF

Make sure the "extra" $2000 of income every year from the RRIF doesnt cost you in GIS or OAS income maximums.

Anyone see any problems with this logic???


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## andrewf (Mar 1, 2010)

You ought to also be able to buy an annuity yielding $2000 a year to claim the tax credit, no RIF required.


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## MoneyGal (Apr 24, 2009)

$30K into an annuity with registered funds will get you $2000 a year in annuity income (for life) at today's rates (this is with a 10-year guarantee option; removing the guarantee will generate a slightly higher payout).


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## Guest (Dec 31, 2010)

andref ... an elegant solution ... I'll look into this, thanks. The one time RRIF constraint, if correct, is a real show stopper. E.g., when I do retire, $40K of my severence can roll into my current RSP which is useful to defer tax; conversion of that RSP to a RRIF at 71 is still useful to defer tax. 

MoneyGal ... I'm also looking into annuities this coming year ... so assume I live to oh I dunno, 87, that's 22 years @ 2K ... $30K gets me $44K ... best case . I'm currently thinking a larger annuity, say $100K, and life insured ... but OT for this thread ... taxation ... unless there are other tax benefits to annuities?


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## Four Pillars (Apr 5, 2009)

rikk said:


> Had some time to go browsing ... my understanding, a RIF is a one time event to which no further contributions can be made so I'll have to give this some thought. I might convert my current self-directed RSP to a self-directed RIF this year to withdraw the $2K/yr for the credit while still working which could be 2 to 5 years. And also start up a new RSP to defer tax; that RSP could not be converted to a RIF. Ok, so, how do I cancel this thread?


I think you are misunderstanding things when you say that a RRIF is a one time event.

You can set up as many RRIF accounts as you wish and you can keep adding money to them as often as you wish - the caveat is that the new money has to come from an RRSP or another RRIF. You can't make "contributions" to a RRIF like you can an RRSP.

So you can convert $14k of your RRSP into a RRIF and use that to get your pension credit. At the same time, you can continue to contribute to the RRSP. 

You can move more money from the RRSP to the RRIF account (or a different RRIF account) at any time. Of course, the RRSP money has to be moved to the RRIF account by the end of the year when you turn 71.


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## Guest (Dec 31, 2010)

Four Pillars ... you are correct, that was my misunderstanding ... thanks! So, using my current RRSP, I can set up a RRIF in 2011, the year of my 65th birthday, such that I withdraw $2K tax free (federal) beginning in 2011. I'll continue on with my RRSP, e.g. contribute, drop that $40K in when the time comes, and go the RRIF route as required ... sounds like a plan.


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## MoneyGal (Apr 24, 2009)

rikk said:


> MoneyGal ... I'm also looking into annuities this coming year ... so assume I live to oh I dunno, 87, that's 22 years @ 2K ... $30K gets me $44K ... best case . I'm currently thinking a larger annuity, say $100K, and life insured ... but OT for this thread ... taxation ... unless there are other tax benefits to annuities?


Your "best case" life expectancy is actually considerably more than age 87. Life expectancy has a much greater standard deviation than stock market returns (although we don't typically think about a "standard deviation" of life expectancy). The expected range of "returns" (dates of death) around the average (average life expectancy) is considerably more dispersed than the expected range of returns around the average for the stock market. 

With life annuities, you don't "life insure" the annuity - you buy an annuity with a guarantee. This will decrease the payout/increase the cost. 

Tax benefits: beyond the scope of a quick response. There are enormous variations in the taxation of annuities based principally on whether you buy the annuity with registered dollars (all payments taxed as ordinary income, as with any other withdrawal from a registered plan) or with unregistered dollars (payments taxed as a combination of interest and return of capital - meaning much of the payment is tax-free).


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## Guest (Dec 31, 2010)

Hi MoneyGal ... ok, "insured annuity" ... http://www.milliondollarjourney.com/how-annuities-work.htm ...


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## MoneyGal (Apr 24, 2009)

An "insured annuity" is not an annuity or an insurance product - it is a strategy to offset the loss of liquidity buying a life annuity represents. 

The blog post to which you linked plays a little fast and loose with assumptions. 

Also, this will not be the optimal solution in all cases. However, in a general sense, I am not going to disagree with the math presented.


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## Guest (Dec 31, 2010)

Sure ... the internet presents all sorts of ideas ... apply reason to all things


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## cardhu (May 26, 2009)

Rikk … several responses have addressed the question of how to set yourself up to claim the pension income credit … but nobody has yet addressed the question of whether it makes any sense to do so. This may be a case of letting the tax tail wag the planning dog. 

If you draw from RRIF while still employed, that withdrawal may be subject to a higher tax rate to begin with, versus the tax rate you might face if you hold off on withdrawals until you’re retired … so you’re essentially volunteering to pay more tax, in order to qualify for a credit … that’s fine as long as the value of the credit exceeds the amount of additional tax, but it is not at all clear that thats how it would turn out. 

For example, if your current income places you in the highest tax bracket (I’ll use ON rates for purposes of this discussion), a $2000 RRIF withdrawal while you’re still working would trigger an additional tax of $928.20, and a tax credit of $397.45, for a net tax burden of $530.75 (26.5%) … contrast this with a tax rate on RRIF withdrawals after retirement, that could easily be in the range of 15 to 20%, or less, depending on your circumstances. This’ll be very individual-specific, so you’ll have to judge based on your own particulars whether it makes sense to proceed. 

If you do determine that it makes sense, the RRIF route would be preferable to the annuity route. All other things being equal, the older you are, the better rate you’ll get on an annuity, so waiting until you’re a little older to initiate an annuity would make more sense than initiating it during a period in your life when you don’t need the income anyway. Also, the RRIF is more flexible... with a small RRIF, the mandatory withdrawals each year will be tiny, so you’d have discretion to draw as much or as little (down to the mandated minimum) as you want in any given year, in the event that you change your mind. 



warp said:


> Anyone see any problems with this logic???


Yes …. the first $2000 of RRIF withdrawal would NOT be tax-free at the federal level, unless rikk’s total income from all sources is less than about $41k, _including _the rrif withdrawal … since he said that he plans to continue working, there’s a good chance that it won’t be ... this occurs because the pension income credit is not a deduction ... its a credit … its not the same thing. 

Rikk has not said how much he earns in his present job, nor which province he lives in, but the tax owing on a voluntary $2000 withdrawal could easily be as much as 25% to 30%, after the tax credit has been applied … contrast this to tax rates that could be as low as 15 to 20%, or less, for RRIF withdrawals in retirement.


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## warp (Sep 4, 2010)

You are right.

I am assuming that since the RRIF withdrawls of $2000 are made between ages 65 and 71 inclusive, the income levels would be under appr $42 K.

If one has a a large RRSP, I still say this makes sense even with incomes up to appr $63 K , (including the $2000 RRIF withdrawl).


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## warp (Sep 4, 2010)

By the way...how do you guys post only a portion of someones "quote" when replying to a post??

I cant figure out how to do that on this board. Any time I try to quote a sentence or two of a post, , the entire "post" appears when I want to quote only a portion of it.

thanks!


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## HaroldCrump (Jun 10, 2009)

warp said:


> how do you guys post only a portion of someones "quote" when replying to a post??


I click quote and then snip out whatever I don't need.
Just make sure the quote is wrapped in [ quote ] and [ / quote ] brackets.


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