February 20th, 2024

Turning 71? It’s time to turn your RRSP into a RRIF

A Registered Retirement Savings Plan (RRSP) is a great way to accumulate tax-deferred investments. When you turn 71 years of age, it’s time to convert those investments into a source of retirement income. Here’s what you need to know.

Over your working life, an RRSP offers you a tremendous tax advantage: every dollar you contribute is tax-deductible, and every dollar you earn is tax-free until you eventually withdraw the money.

During the year in which you turn 71, you are required to convert your RRSP into a Registered Retirement Income Fund (RRIF), which effectively reverses its function. While the assets inside your RRIF are still allowed to grow on a tax-deferred basis, no more tax-deductible contributions can be made, and fully-taxable withdrawals must begin.

How much do I have to withdraw and when?

Your first RRIF withdrawal is required in the year after you turn 71, and is equal to 5.28% of the fair market value of your account at the start of the year. This percentage is set by the federal government and gradually increases as you age, surpassing 10% by age 88 and peaking at 20% for age 95 and beyond.

For example, if you turn 71 in 2024, you’d use the value of your RRIF on December 31, 2024 to calculate your minimum withdrawal for 2025. If your account was worth $1 million on that date, you’d be required to withdraw $52,800 ($1 million x 5.28%) in 2025.

Here are a few things to keep in mind:

  • Convert before the end of the year. The process is not complicated, but it is crucial. If your RRIF is not established by the end of the year in which you turn 71, all the funds in your RRSP will become taxable income to you in that year.
  • Set a withdrawal schedule. You can choose to make withdrawals monthly, quarterly, or annually. The timing you choose might depend on how you intend to use the income. Will it be needed monthly to offset expenses, or is it better to keep the money invested and growing as long as possible, then make one big withdrawal at the end of the year?
  • Consider using your spouse’s age. If your spouse is not yet 71, you can use their age to calculate your minimum RRIF withdrawal, which might allow you to keep the funds in the account longer where they can remain tax-deferred.
  • Be aware of income tax and withholding tax. All RRIF withdrawals are considered taxable income in the year they are received. If you decide to withdraw more than the minimum in a given year, withholding tax will be deducted from those withdrawals.
  • Review your beneficiaries. If you pass away with a spouse or qualified dependent named as your beneficiary, they are eligible to receive the proceeds of your RRIF tax-free. Other beneficiaries will be taxed on any amount they receive.

If you are turning 71 this year, it’s a good time to sit down with your Cumberland Private Wealth advisor. We can help you convert your RRSP to a RRIF before the end of the year. We can also look at whether it makes sense to adjust your portfolio as you shift from accumulating savings to drawing income, and how best to use that income from a tax and cash flow perspective.

Your RRIF conversion year is also the perfect time for us to review your overall financial plan and estate plan, update your goals, and make sure that you are still on track for the financial future that you envision.