Understanding the transition from a Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF) is crucial, especially at age 71. While mandatory conversion occurs then, earlier switching can provide benefits, such as generating needed income or deferring other pensions for maximized benefits. RRIFs allow continued investment growth with annual minimum withdrawals based on age. Effective management strategies include spousal contributions and using tax credits to optimize retirement income and minimize taxes.
Understanding RRSPs and RRIFs
For those who have invested in a Registered Retirement Savings Plan (RRSP), it’s essential to understand the conversion process to a Registered Retirement Income Fund (RRIF) once you reach the age of 71. However, have you considered the benefits of making this switch earlier?
RRSPs are a fantastic tool for accumulating savings for retirement while allowing you to enjoy tax deductions during your contribution years. Unfortunately, contributions to your RRSP must cease on December 31 of the year you turn 71. At this point, it becomes mandatory to transfer your RRSP to an RRIF.
What is a RRIF?
A RRIF can be seen as a continuation of your RRSP, and it serves to provide you with income during retirement. According to Simon Houle, an independent financial planner and Portfolio Manager at Groupe Onyx with IA Private Wealth Management, “The money remains invested, and the income generated within the RRIF is tax-exempt. Only the amounts withdrawn are subject to taxation.”
After converting to a RRIF, you will need to make annual withdrawals starting the following year until the funds are depleted. While you can withdraw any amount, there is a mandatory minimum percentage based on your age or that of your spouse, whichever is more beneficial. For instance:
- Age 72: Minimum withdrawal of 5.40%
- Age 73: Minimum withdrawal of 5.53%
- Age 79: Minimum withdrawal of 6.58%
- Age 85: Minimum withdrawal of 8.51%
- Age 89: Minimum withdrawal of 10.99%
- Age 95 and older: Minimum withdrawal of 20%
These percentages are calculated based on the value of your portfolio as of December 31 of the previous year. You can choose to receive payments annually, quarterly, or monthly, depending on what best fits your financial management needs.
Advantages of Early Conversion to RRIF
Although the federal regulations stipulate that conversion takes place in the year you turn 71, you have the option to transition to a RRIF earlier if you desire. Simon Houle notes, “The primary purpose of the RRSP is to keep it invested as long as possible for tax-deferral benefits. However, an earlier conversion might be advantageous in certain circumstances, such as needing extra income due to early retirement.” Factors like health conditions and life expectancy can also influence this decision.
Another scenario worth considering is when an individual is already retired but prefers to postpone receiving their Quebec Pension Plan (QPP) and Old Age Security (OAS) benefits to maximize those amounts. In such cases, drawing from their RRIF could be a viable option. “This year, individuals can defer their QPP from age 65 to 72, potentially enhancing their pension by up to 58.80%. Similarly, deferring OAS from 65 to 70 yields a 36% increase,” Simon Houle adds.
Minimum withdrawal rates from the RRIF will differ based on age, so it’s important to evaluate various scenarios to identify what works best for you.
Helpful Tips for RRIF Management
- After December 31 of the year you turn 71, you can still contribute to a spousal RRSP if your spouse is 71 or younger, provided your maximum deductible allows for it.
- If your spouse is younger, you can calculate the minimum withdrawal based on their age, which may lower your required withdrawal and thus reduce your taxable income.
- Starting at age 65, you may qualify for a tax credit on the first $2,000 of income, and splitting retirement income with your spouse can help lower your tax liabilities.
- While you must make a minimum withdrawal from your RRIF, if you don’t need that income, consider placing it into a Tax-Free Savings Account (TFSA) to enjoy tax-exempt investment growth.