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Insights & advice

Converting an RRSP into a RRIF

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If you’re like many Canadians, retirement is an important accomplishment: a transition to spending more time however you want. As you approach the end of your working years, it’s important to look into options that can maximize your savings and make them last. 

If you’re retired, or are nearing retirement, a Registered Retirement Income Fund (RRIF) should be on your radar. Let us fill you in on some things you should know about RRIFs.

So, how does a RRIF work?

Basically, it’s a Registered Retirement Savings Plan (RRSP) in reverse. Where an RRSP helps you save for retirement through annual contributions, a RRIF does the opposite. It requires you to make annual minimum withdrawals from your savings to help fund your retirement. A RRIF gives you several choices when it comes to investing your money. You can hold different investments – such as mutual funds, segregated funds, Guaranteed Interest Options (GIO), Exchange Traded Funds (ETF), etc.

If there is money left in your RRIF when you die, it goes to the beneficiaries you’ve named in the application for the RRIF as part of your  estate planning. In bankruptcy, you get the same creditor protection for funds in a RRIF as you would in an RRSP.

A RRIF’s flexibility has certain responsibilities. The more income you take out in the short term, the less money you’ll have left in the long term.

Are withdrawals from my RRIF taxable? 

Yes. Remember all those years you were making RRSP contributions and lowering the income tax you paid? Well, you were postponing those taxes, not avoiding them completely. 

The good news is that you won’t pay any taxes when you convert your RRSP into a RRIF, because you’re not withdrawing the money right away. The funds you take out of your RRIF each year, however, are taxable in the year you get them. 

Here are some simple rules to remember about RRIFs and taxes: 

  • You don’t pay tax on money in your RRIF, if it stays there. This includes any growth on your investments inside the RRIF.
  • You only pay tax on the money you withdraw from your RRIF each year, which is treated as income.
  • And if you take out more than your minimum amount, taxes will be withheld at the time of withdrawal because financial institutions have to collect tax right away.

At what age do I have to convert the RRSP to a RRIF?

You can choose to withdraw your RRSP as a lump sum or convert it into a retirement income product such as a RRIF by the end of the year that you turn 71.

RRSPs are designed to help you save money for retirement by postponing tax payments on your contributions. You contribute money to your RRSP while you’re working and earning an income. During retirement you’ll (in theory) have a lower total income. This means you’re in a lower tax bracket and the money you’re withdrawing from your RRIF is taxed at a lower rate.

You must start taking a RRIF income by the end of the calendar year in which you turn 72. For example, if you turned 72 in 2018, you have until Dec. 31 of 2018 to start getting that money.

How much do I have to withdraw from my RRIF each year?

The minimum amount you must withdraw from a RRIF each year is based on a percentage of the balance of the total investment at the start of the year. These percentages increase as you get older. There is flexibility here too, as you can choose how often you take money from the account: monthly, quarterly, semi-annually or annually.

There are a set of minimum withdrawals that you have to make from your RRIF , but there is no maximum withdrawal. The percentage starts at just over 5% when you turn 71 and tops out at 20% for those aged 95 and over. If your partner is younger than you, you can use his or her age to calculate the minimum amount you must withdraw each year.

Can I convert a RRIF back to an RRSP?

In short, yes, but it depends on your age. Once you create a RRIF, you can’t contribute money to it, and the plan can’t be cancelled until you die. If you wanted to, however, you could convert a RRIF back into an RRSP if you’re under the age of 71. An important thing to remember is that you’re allowed to open multiple RRIFs.  This means you can slowly move funds into one RRIF while still contributing to an RRSP, until the age of 71. At that point, you can open another RRIF and transfer the rest of your money from the RRSP.

Your advisor is an excellent source of information about your different options for creating income in retirement. He or she can guide you with advice on the beste choices for your financial situation.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.

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