Converting Your RRSP to a RRIF: What You Need to Know

When it comes to retirement planning in Canada, Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are two essential tools. While most Canadians are familiar with RRSPs as a way to save for retirement, fewer understand what happens when it’s time to convert those savings into retirement income. This transition is mandatory, and it comes with its own set of rules and tax implications. Let’s break it down.

Why You Need to Convert Your RRSP to a RRIF

By the end of the year you turn 71, the Canadian government requires you to either:

1. Convert your RRSP into a RRIF

2. Purchase an annuity, or

3. Withdraw the entire RRSP balance as a lump sum (not recommended due to high tax consequences).

The primary reason for this requirement is that RRSPs are designed as tax-deferred savings vehicles, not permanent accounts. The government wants to ensure that you begin withdrawing and paying taxes on these funds to generate retirement income. Converting your RRSP to a RRIF is the most common and flexible choice, as it allows you to maintain control over your investments while receiving a steady stream of income.

What Is a RRIF?

A RRIF is essentially an extension of your RRSP. The key difference is that while you contribute to an RRSP, you withdraw from a RRIF. You can continue to invest your funds within the RRIF, but you must withdraw a minimum amount each year. These withdrawals are taxable as income.

Minimum Withdrawal Rules

Once your RRSP is converted to a RRIF, you are required to withdraw a minimum amount each year. The minimum withdrawal is based on your age (or your spouse’s age if you choose) at the start of the year and is calculated as a percentage of your RRIF balance at the beginning of the year.

Age	Minimum Withdrawal Percentage
71	5.28%
72	5.40%
73	5.53%
74	5.67%
75	5.82%
76	5.98%
77	6.17%
78	6.36%
79	6.58%
80	6.82%
81	7.08%
82	7.38%
83	7.71%
84	8.08%
85	8.51%
86	8.99%
87	9.55%
88	10.21%
89	10.99%
90	11.92%
91	13.06%
92	14.49%
93	16.34%
94	20.00%

Tax Implications of RRIF Withdrawals

Since RRSP contributions are tax-deductible, any withdrawals from a RRIF are considered taxable income. This means the more you withdraw, the higher your taxable income for the year. If you withdraw more than the minimum required amount, withholding tax will apply to the excess portion. Managing your withdrawals carefully can help you minimize your tax burden and avoid being pushed into a higher tax bracket.

Tips for Managing Your RRIF Withdrawals

1. Plan for the Minimum: Ensure you understand the mandatory withdrawal percentages and incorporate them into your retirement budget.2. Avoid Large Lump-Sum Withdrawals: Large withdrawals can trigger higher taxes and potentially reduce government benefits like Old Age Security (OAS) due to the OAS clawback.3. Optimize for Spousal Age: If your spouse is younger, you can base the minimum withdrawal calculations on their age to reduce the required withdrawals and defer taxes.4. Coordinate with Other Income Sources: Consider your total income sources, including pensions and investments, to optimize your tax efficiency.5. Work with a Financial Planner: A Certified Financial Planner (CFP®) can help you create a customized withdrawal strategy that aligns with your retirement goals and minimizes taxes.

Conclusion

Converting your RRSP to a RRIF is an important step in your retirement journey. By understanding the rules and planning ahead, you can ensure that your savings last throughout your retirement while managing your tax obligations. If you have questions about RRIFs or need help creating a retirement income plan, reach out to Founders Wealth today. Our team is here to help you navigate this transition with confidence.