What is the best age to convert your RRSP to a RRIF? Determining the ideal age to convert your Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund (RRIF) is an important decision that can have long-term financial impacts. While every situation is unique, there are a few strategic ages to consider, each with its own set of pros and cons. In this article, we’ll walk through these considerations and help simplify this critical retirement decision.

RRSP to RRIF Conversion: Key Rules and Minimum Withdrawal Rates

You are required to convert your RRSP to a RRIF by the end of the year you turn 71. In the following year, you must make your first mandated minimum withdrawal, which increases as you age. Here’s a quick overview of how it works:

• Age 71 and Older: Your minimum withdrawal rate is determined by your age, starting at 5.28% at age 71 and increasing to 20% by age 95.
• No Maximum Withdrawal: You can withdraw more than the mandated minimum, but this may have tax implications.

Tip: Use a Younger Spouse’s Age to Reduce Minimum Withdrawals

If you have a spouse who is younger than you, you can use their age to calculate your mandated minimum withdrawals. This strategy can help keep your income lower, providing greater tax efficiency.

Option 1: Convert at Age 71 (When Forced)

Pros of Waiting Until 71

• Lower Income Prior to Conversion: By delaying, you can keep your income lower and potentially draw from other, more restrictive retirement accounts like a Locked-in Retirement Account (LIRA).
• Maximize Other Assets: If you have a LIRA, which has withdrawal restrictions, it might make sense to draw down this account first.

Cons of Waiting Until 71

• Potential for a Tax Bomb: Waiting too long can make your RRIF balance grow significantly, leading to larger mandated withdrawals that could push you into a higher tax bracket. Additionally, if you don’t have a surviving spouse, the entire balance of the RRIF may be taxable upon your death, potentially triggering a tax rate of over 50%.

Option 2: Early Conversion (Age 55)

Pros of Early RRSP to a RRIF Conversion

1. No Tax Withholding on Minimum Withdrawals: Withdrawals from a RRIF are not subject to withholding tax, unlike RRSP withdrawals. This means you keep more money in your hands to invest or earn interest.
2. Avoid RRSP Withdrawal Fees: Financial institutions often charge fees for RRSP withdrawals, while RRIFs generally allow for free regular withdrawals.

Cons of Early RRSP to a RRIF Conversion

• Forced Income: Once converted, you’re required to take a minimum withdrawal every year, even if you don’t need the income.
• Inflexibility: Converting early can lock you into a schedule, and while it’s possible to convert back, doing so can be cumbersome.

Option 3: Convert Earlyish (Around Age 65)

Pros of Converting RRSP to a RRIF at 65

1. Pension Credit Eligibility: Withdrawals from a RRIF qualify for the federal pension income credit, which can save you hundreds of dollars on your tax return. This is not available for RRSP withdrawals.
2. Income Splitting: After age 65, RRIF income can be split with a spouse, unlike RRSP income. This can double your pension credits and reduce your overall tax bill.

How to Optimize

• Partial Conversions: You don’t have to convert your entire RRSP at once. You could convert a small amount, like $2,000, to take advantage of the pension credit.

Making the Right Decision for Your Retirement

As you can see, the timing of your RRSP to a RRIF conversion depends on various factors, including your income needs, tax situation, and overall financial strategy. Here’s a quick recap:

• Convert Late (71): Good for keeping your income low early in retirement but risks higher taxes later.
• Convert Early (Before 65): Reduces RRSP withdrawal fees and withholding taxes but comes with mandatory withdrawals.
• Convert Earlyish (65): Provides tax benefits like the pension credit and income splitting.

Need Help With Your Withdrawal Strategy?

Navigating the complexities of retirement income planning can be challenging. If you’d like personalized guidance on when to convert your RRSP to a RRIF, schedule an introductory call here!