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Is the Clock Ticking Down on Your RRSP?

Federal income tax rules require you to convert your registered retirement savings plan (RRSP) to a registered retirement income fund (RRIF), or another income option such as an annuity, by the end of the year you turn 71. Here’s what you need to know:

  • You must convert your RRSP to another income option by the end of the year (i.e., by December 31) of the year in which you turn 71. (You can do it earlier if you like.)

  • If you don’t make the transfer by that date, your RRSP will become taxable income.

When it’s time to draw on your RRSP for income, you have three choices:

  1. Convert your RRSP to Registered Retirement Income Fund (RRIF)
  2. Purchase an annuity
  3. Take the full amount in cash (this could result in a significant income tax bill in a single year)


How Do RRIFs Work?

In some ways, a RRIF isn’t much different than an RRSP. You can hold most of the same investments you have in your RRSP, and they will continue to grow tax-sheltered. The difference is that a RRIF is used to withdraw retirement income —you’ll no longer be able to deposit. You must withdraw minimum amounts that start at low levels and increase with age. All RRIF withdrawals are considered income and must be reported on your personal tax return.

Do you know the answers to these key questions?

If minimizing tax and maximizing income during retirement are important to you, make sure you and your MD Advisor discuss these crucial questions about tax, retirement income and estate planning.

  1. Tax planning: What are the immediate implications of converting your RRSP to a RRIF? How can you effectively manage the tax bracket you’re in throughout retirement? Do you understand how the Old Age Security (OAS) clawback thresholds work?

    It’s crucial that you time your RRIF payments appropriately, and that you don’t withdraw more than you need. The wrong timing could unnecessarily put you in a higher tax bracket or reduce your income-tested OAS payments.

    If you have a younger spouse, you can base the withdrawal schedule on his or her age, thereby reducing your minimum required withdrawal amount. For example, if you are turning 71 this year and your spouse is 64, you can choose this option when you set up your RRIF, effectively lowering the mandatory withdrawal amounts and reducing your taxable income. This is a beneficial strategy if you don’t need the extra income.

  2. Retirement income: Are you confident your assets are adequate and you won’t outlive them? Which investments should you draw income from? If you’re incorporated, how can you best combine corporate and personal income sources in retirement? Is your risk exposure appropriate, or should your asset allocation change in retirement?

    Your MD Advisor can take a holistic look at your investments and do a retirement income assessment to determine which investments you should draw income from, and when. This will help you create a plan that provides the income you need to live—and the investment returns that will help your money last throughout retirement.

    Be aware that in most cases, consolidating your investments and simplifying your accounts will streamline the process come tax time.

  3. Legacy planning: How are you planning to pass your wealth on to the next generation? Who will be the beneficiary of your RRIF? What if you have more income than you need? Where do you invest the excess?

This is an ideal time to review your estate plan and make adjustments. For example, you may consider naming your spouse as the beneficiary of your RRIF. This will ensure that RRIF payments continue to go to your spouse after your death, minimizing estate administration costs and taxes. Naming a beneficiary will help minimize probate fees, maximizing the amount transferred to your beneficiary.

Plan for a secure, enjoyable retirement

While converting your RRSP to a RRIF is easy, without the right financial advice you could miss out on opportunities to increase your savings and reduce your taxes.

Make sure your retirement income strategy protects your hard-earned savings, minimizes tax, and sufficiently funds your well-deserved retirement.