Managing U.S.-Dollar RRSP Withdrawals in Retirement

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I am 70 and have already turned my RSP into a RIF. However, I also have a U.S. RSP which will need to be dealt with next year at the latest. What do I do with it? Roll it into my Canadian RIF within the next year? Leave it as a separate RIF and take the necessary money from each separately?

I was advised to open this separate RSP for my U.S. stock holdings in my Canadian RSP years ago. I am not sure what the advantage was or is—but now it has become a bit of a pain in the neck.

—Liz

Is it worth combining U.S. and Canadian dollar RRIFs?

A registered retirement savings plan (RRSP) must be converted to a registered retirement income fund (RRIF) by December 31 of the year you turn 71, but you don’t have to convert the whole RRSP at once. Many retirees convert part of an RRSP to a RRIF to take advantage of tax credits and leave the rest invested. The pension income tax credit, for example, can make the first portion of RRIF withdrawals effectively tax-free if structured correctly.

Given your age, Liz, your U.S. dollar RRSP will need conversion soon. You have two basic choices: convert that U.S. RRSP into a U.S. dollar RRIF and keep it separate, or transfer the holdings into your Canadian dollar RRIF. Which option is better depends on costs, convenience and how you want to manage currency exposure.

RRIF withdrawal rules you need to know

RRIFs require a minimum annual withdrawal. That minimum is a fixed percentage of the account balance as of December 31 of the previous year and rises with age. If you convert to a RRIF at age 71, the minimum withdrawal the following year is 5.28% of the account value. Importantly, RRIF minimums are calculated per account. You cannot offset a shortfall in one RRIF by withdrawing more than the minimum from another.

There is no statutory maximum withdrawal from a RRIF, but taking the entire balance in a single year is rarely smart because withdrawals are fully taxable and can push you into a higher tax bracket. The same account-by-account rules apply to other registered retirement accounts, such as locked-in RRSPs, though locked-in accounts often must be converted into provincially defined vehicles like life income funds (LIFs) that impose both minimums and maximums.

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Advantages of keeping a U.S. dollar RRSP or RRIF

A U.S. dollar RRSP or RRIF makes it easier and cheaper to hold U.S.-listed investments. In a U.S. dollar account you can buy, sell and hold U.S. securities without converting Canadian dollars to U.S. dollars each time. That reduces currency conversion costs and avoids repeated foreign exchange spreads when you buy or sell or when dividends are paid in U.S. dollars.

Brokerage foreign exchange fees can range from about 1% to 2% when changing currencies. Maintaining a U.S. dollar registered account avoids those conversion costs for transactions and allows U.S. dollar dividends to remain in U.S. currency, which can be helpful if you travel or spend in the U.S. later in retirement.

Another option: Canadian Depositary Receipts (CDRs)

If your brokerage does not let you hold a U.S. dollar RRIF, consider Canadian Depositary Receipts (CDRs). CDRs represent foreign companies but trade in Canadian dollars on Canadian exchanges. They are often currency-hedged so the price movement of the underlying U.S. shares is mirrored in Canadian dollars regardless of exchange rate fluctuations.

That sounds appealing because it removes currency volatility, but currency hedging also reduces the diversification benefit that comes from holding assets denominated in different currencies. If part of your goal is to diversify currency exposure, hedging may be counterproductive.

Should you combine your Canadian and U.S. dollar RRIFs?

In short, you can and often should keep your U.S. dollar account separate by converting the U.S. RRSP to a U.S. dollar RRIF. Keeping the account in its original currency preserves lower transaction costs and avoids repeated FX conversions on trades and dividends. It also keeps each RRIF’s minimum withdrawal calculation straightforward and separate.

If managing multiple accounts is too cumbersome, you can transfer U.S. investments in kind into your Canadian dollar RRIF on a tax-deferred basis. That move simplifies paperwork, but it brings the downside of future currency conversion costs whenever you trade or receive dividends—effectively increasing your ongoing costs by the FX spread or transaction fee charged by your brokerage.