How to cope with the RRSP-to-RRIF deadline in your early 70s

The latest you can receive your first RRIF payment

Here’s how Matthew Ardrey, senior financial planner at Toronto-based firm Tridelta Financial, sees RRSP-to-RRIF conversions: “By the year in which one turns 72, the government mandates that the taxpayer convert their RRSP to a RRIF and draw out at least the minimum payment. The minimum payment is calculated by the value of the RRIF on January 1 multiplied by a percentage rate that is tied to the taxpayer’s age. Each year, the older they get, the higher that percentage becomes.” That means: you must tell your RRSP financial institution you will convert your RRSP into a RRIF before December 31 of the year you turn 71. The actual first RRIF withdrawals would then begin at age 72.

Currently, the minimum RRIF withdrawal is a modest 5.4% of the market value of your account assets at age 72, which is the latest that you can receive the first RRIF payment. At age 71, it’s 5.28%. By the time you reach age 95, this rises to 20% of market value, says Rona Birenbaum, founder of Caring for Clients, a financial planner service in Toronto.  

You should take the RRSP-to-RRIF deadline seriously: You must convert by December 31 of the calendar year you turn 71. So, for me personally, my deadline is December 31, 2024. 

What if you miss the deadline for your RRIF? 

Birenbaum cautions that 100% of your RRSP’s value becomes taxable income when you turn 72, which may push you into a needlessly high marginal tax rate. For those with hefty RRSPs, losing almost half of it in a single tax year would be prohibitively expensive. 

There’s also the option of using your RRSP to purchase an annuity, which involves giving the RRSP proceeds to an insurance company in return for a guaranteed annual income for life. However, Birenbaum says most of her clients opt for the RRIF, because of its greater flexibility compared to an annuity. Given the common inclination to procrastinate on saving for retirement, most near-retirees in Canada will probably want to keep their RRSPs going until the bitter end and aim for this “age 71” deadline to convert. 

Technically, however, you can open a RRIF earlier than is mandated, Birenbaum says: “There is no earliest age, though it’s rarely beneficial to open a RRIF during your working years.” 

RRSPs vs. RRIFs

RRSPs and RRIFs are similar in several respects, but Birenbaum notes some important differences. 

• Both are tax-sheltered vehicles, and they can hold the same investments.
• Withdrawals are fully taxable as income for both. 
• However, RRSP contributions are tax-deductible, while you can’t contribute to a RRIF (so there are no tax deductions). 
• RRSPs don’t have mandated withdrawals, whereas RRIFs do, starting in the calendar year after the account is opened. 
• RRSPs have no minimum withdrawals, although taking money out is permitted. Your only option is to request a one-time lump-sum withdrawal (and pay tax on it at various rates depending on the amount you wish to withdraw).
• RRIFs have mandated annual minimum withdrawals, which rise steadily over time. Unlike an RRSP, a RRIF lets you automate withdrawals for ease of cash flow management (monthly, quarterly, annually etc.).  

How are RRIFs taxed?

When RRIF income is received, it’s treated as fully taxable income, Ardrey says. Unlike Canadian dividends, there’s no tax credit for RRIF income. “Though this income is a cornerstone for many Canadians, it can also cause tax complications that were not there before the income was received,” he says.

Unless taxpayers make a request, there are no withholding taxes on the minimum RRIF withdrawal. This can result in the Canada Revenue Agency (CRA) requesting quarterly tax installments in the future: after filing a tax return where net taxes owing (taxes owing less the taxes deducted at source) exceed $3,000. 

If this looks to be an annual event, it’s wise to pay the tax installments, as the CRA will charge installment interest on the amounts outstanding or paid late, Ardrey says. “That rate of interest is currently at 10%.” 

(Of course, if you overpay installments, the CRA will not pay you any interest.)

Withholding taxes is another consideration. These are not the same as your final tax bill (after you die), Birenbaum says, but instead are “a default percentage the government takes upfront to ensure they get (at least some) tax on RRSP or RRIF withdrawals.” If you’re in your 60s and have ever taken money from your RRSP, you know you pay 10% withholding tax for withdrawals of $5,000 or less, 20% between $5,001 and $15,000, and 30% over $15,000. Amounts are higher in Quebec.

But the rules are different for RRIFs; there are no withholding taxes required on minimum withdrawals. Outside Quebec, withholding taxes are the same for RRSPs, says Birenbaum. For systematic withdrawals, withholding taxes are based not on each individual payment but on the total sum requested in the year that exceeds the minimum mandated withdrawal. 

You don’t necessarily want to pay the least in withholding taxes, as many may know from making RRSP withdrawals in their 60s. You can always request paying a higher upfront withholding tax on RRIF withdrawals, if you expect to owe more at tax-filing time due to other pension and investment income. You can also set aside some RRIF proceeds in a savings account dedicated to future tax liabilities. 

Do RRIFs trigger OAS clawbacks?

Another complication of extra RRIF income is that it can trigger clawbacks of Old Age Security (OAS) benefits. If your total income exceeds $90,997, OAS payments will be clawed back by $0.15 for every dollar over this amount until they reach zero.  

Income splitting with a RRIF

Fortunately, there are ways to minimize these tax consequences. If you are one half of a couple, you can benefit from a form of pension income splitting: RRIF income can be split with a spouse on a tax return when appropriate, providing the taxpayer is over 65. An income split of $2,000 can provide a pension tax credit for the spouse, which could be the difference between being impacted by the OAS clawback or not.

Prepping for a RRIF

For those readers for whom RRIFs are not yet an issue, Ardrey suggests the common tactic of withdrawing money from an RRSP/RRIF prior to age 72, ideally in years when you are not in the top tax brackets. “This then lowers the balance in the account and thus, creates a lower minimum payment.”

Another gambit is basing your minimum RRIF payment on the younger spouse’s age. By doing this, the older taxpayer gets their younger partner’s age percentage applied to their own RRIF minimum payment.

Converting an RRSP to a RRIF isn’t an all-or-nothing decision. You can do a partial RRIF conversion if you’re under 71, by transferring a portion of your RRSP to a new RRIF. Even if your projected withdrawals are modest, pulling funds from a RRIF regularly is easier to administer than making manual RRSP withdrawals. Birenbaum says: “Unlike with an RRSP, a RRIF lets you automate the timing and amounts of withdrawals.”

Can you change your mind about using a RRIF?

If you open a RRIF early and later realize you made the wrong choice, a RRIF can be converted back to an RRSP, as long as the account owner is 71 or younger.  

“This might make sense if your taxable income or cash flows are unexpectedly higher than projected and you’d like to stop mandated minimum withdrawals before age 72,” says Birenbaum.

Since the whole point of having RRIFs is to provide cash flow in one’s golden years, it makes sense to align systematic RRIF withdrawals with your cash-flow needs. As Birenbaum says, you can receive payments quarterly or monthly or any other frequency. If you’re using the money to fund daily spending, monthly payments are best. If you need cash for lump-sum expenses, like property taxes or annual vacations, annual withdrawals may serve you better. 

Of course, your cash-flow needs may be met by other pensions, in which case Birenbaum recommends selecting an annual December withdrawal, thereby leaving funds tax-sheltered for as long as possible (just like when the RRIF was an RRSP). Or you could be strategic and use your withdrawals to fund annual TFSA contributions. 

The mechanics of conversion

Financial institutions usually reach out to customers to remind them about RRSP conversion before the deadline, says Birenbaum. When you convert your RRSP, you’ll need to file paperwork at the institution where you’d like to hold the RRIF. You can hold your RRIF at the same institution or at a different one. Your existing RRSP investments can simply be transferred to your new RRIF. You can consolidate everything into one RRIF or open multiple RRIFs. One RRIF will be easier to administer. The initial paperwork will ask you to set your desired payment schedule (day of month and payment frequency), and for you to choose RRIF minimums based on your age or that of your younger spouse. 

When you die, the RRIF’s market value is fully taxable as income on a final income tax return. Since Ontario’s top marginal tax rate for 2023 is 53.53%, this means that more than half of large RRIFs could go to taxes. This can be deferred if you make your spouse or common-law partner the beneficiary or have financial dependents in certain permitted categories. 

You can also convert a locked-in retirement account (LIRA) to a life income fund (LIF). This process is similar to converting an RRSP to a RRIF. I will have to cover that in a future column. But a LIRA has to be converted to a LIF or to a life annuity by the end of the calendar year you turn 71. Withdrawals will start the following year, when you turn 72. As Ardrey notes, there are more restrictions with LIRA/LIF conversions.   

Fact vs. fiction: What are the most misunderstood aspects of RRSP-to-RRIF conversions? 

Aaron Hector, private wealth advisor with Calgary-based CWB Wealth, lists six aspects:   

1. Some Canadians think they must make a withdrawal in the year they turn 71, but that’s not true. Age 71 is the year that you need to convert your RRSP into a RRIF, but the first required minimum withdrawal payment does not need to occur until the following year, when you’re 72. (Read: “RRIF and LIF withdrawal rates: Everything you need to know”) 
2. You don’t have to have tax withheld on your minimum RRIF withdrawal payments. However, the income is still fully taxed at the same rate, whether you had tax withheld or not. The distinction is around the timing and method by which you remit tax payments.  
3. If you choose not to have withholding tax on minimum withdrawals, you’ll likely end up with a large tax bill when you file your return. If this happens twice in three years, you will have to pay quarterly installments, which is more onerous than having tax withheld on payments. According to Hector: “My advice would be to try and determine what your average rate of tax will be on your total income (from all sources), and then set your withholding tax percentage to that figure.”    
4. When opening a RRIF, the option of using your spouse’s age is not a one-time choice: You can change your mind. There’s no one-size-fits-all approach here, though. “I’ve even had a couple situations where it made sense to base the minimums on the older spouse’s age because we wanted to increase the minimum payment,” says Hector.   
5. The timing of payments is flexible. The only requirement: The minimum payment each year has to be withdrawn from the RRIF by the end of the calendar year. If you wish, you could take out $7,000 in January to top up a tax-free savings account (TFSA), and then withdraw the rest in December of the same year. Or you could take equal monthly payments, quarterly payments or payments at random. Hector says: “The choice is yours. You just need to take the minimum out each year.” 
6. If you’re 65 or older, your RRIF withdrawals are considered eligible pension income, so they qualify to be split for tax purposes with a spouse. To do this, a couple makes a joint election using Form T1032 when filing their respective tax returns.  

Until next time, when we’ll look at LIRA-to-LIF conversions and annuitization.

Read more Retired Money columns:

• Are GICs worth it for retirees?
• Tontines in Canada: Moving from theory to practice as a solution to our retirement crisis
• How much money do you need to retire in Canada? Is it really $1.7 million? 
• Inflation a scourge for retirees? Ottawa’s silver lining(s)

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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