The Best Age to Convert Your RRSP to a RRIF

What’s the best age to convert your RRSP to a RRIF? There are a lot of factors that go into making this decision, such as your age, your current and future income needs, and what other retirement accounts you have access to.

 

As you can imagine, with so many variables in play, it took a little bit of time to crunch the numbers to determine the optimal time to make the conversion.

To simplify things a little bit, we’re going to compare the pros and cons of converting your RRSP to a RRIF at three different stages.

  1. When you are forced (Age 71)
  2. Early (Age 55)
  3. Earlyish (Age 65)

 

At 71

As we know, you are forced to convert your RRSP to a RRIF by the end of the year you turn 71. In the following year, you will be forced to make your first mandated minimum withdrawal.

If Nicole opened a RRIF in the year she turned 71, her first mandated withdrawal would take place the following year.

The mandated withdrawal is determined by your age. Depending on your age, there will be a set percentage that you will be forced to withdraw from your account by the end of the year. As you grow older, this percentage will increase until it hits 20% at age 95.

There is no max withdrawal, you could withdraw the entire account in one year, but that likely wouldn’t make sense from a tax perspective.

 

However, if you have a spouse and they are younger than you, you can use their age when opening the RRIF to determine your mandated withdrawals.

In keeping with the same example, rather than Nicole using her age, she could use her husband Larry’s age, who happens to be 65.

By doing this, Nicole’s forced withdrawals in the future will be lower as they are based on Larry’s age.

This is a good strategy to use if you want to keep your income from the RRIF as low as possible.

 

71: Pros & Cons

One of the pros is that it keeps your income lower prior to the RRIF conversion. This allows you to draw on other retirement accounts that may be more restrictive.

For example, we have clients who have RRSPs, but they also have Locked-in Retirement Accounts also known as a LIRA. A LIRA is a pension from an old employer.

Because these funds are from a pension, there are more restrictions on withdrawals depending on the legislation of the plan. Like an RRSP, a LIRA will be converted to a LIF when you are ready to make withdrawals.

A LIF is similar to a RRIF in the sense that there’s a mandated minimum withdrawal, but there is also a maximum withdrawal. This maximum withdrawal restriction leads to less flexibility, so I’d rather use this account up first, prior to accessing the RRIF.

 

The downside of waiting until you are 71 to make the conversion is that you may be creating a tax bomb.

In theory, the longer you wait until you make the conversion, the larger the account will be. Don’t get me wrong, this is a good thing, but it can have two negative effects.

  1. Your mandated withdrawals will be higher as the value of the account will be larger. These larger withdrawals could push you into a higher tax bracket
  2. When you pass away, the entire value of the RRIF is taxable in the year of death if you don’t have a surviving spouse. This could lead to the RRIF being hit with a tax bill of over 50%.

To avoid this tax bomb, you can make the conversion to a RRIF much sooner.

 

At 55

Let’s say Chris retires at 55 and decides to convert his RRSP to a RRIF. This is much earlier than the mandated conversion at age 71.

Why would you want to make this conversion so early? After all, you can make withdrawals from an RRSP, so why rush the conversion?

 

There are a few benefits to making the conversion early.

The first is that if you make a withdrawal from an RRSP, you will need to pay tax at source, whereas you don’t need to pay tax at source on your minimum RRIF withdrawal.

For example, let’s say Chris has $1 Million in his RRIF at age 56. His mandated withdrawal for the year is 2.94% or just over $29,000. He can make this withdrawal from his RRIF without paying any tax upfront. If he made the same withdrawal from his RRSP, he would need to pay a 30% tax.

Chris will still need to pay this tax when he files his taxes, but the money stays in his hands in the meantime, and he can make some interest on it.

Another reason to convert to a RRIF early is that most financial institutions will charge a fee to withdraw funds from an RRSP, whereas there is no fee to set up a regular payment from a RRIF. If you plan on receiving income from your RRSP monthly, these fees can really add up.

 

One of the downsides of making the conversion early is that you are now forced to take income every year. Let’s say the following year, Chris didn’t want any income from his retirement portfolio. If he already has money in a RRIF, he’ll be forced to withdraw the minimum amount.

You can convert your RRIF back to an RRSP, but it can be a pain to go back and forth when you need the funds.

You can also make the conversion from the RRSP to a RRIF earlyish.

 

At 65

A good time to make the conversion is at age 65.

The benefit of converting your RRSP to a RRIF at this age is that withdrawals from a RRIF would qualify for the pension credit, whereas withdrawals from an RRSP would not qualify.

If you have no other pension income, excluding CPP and OAS, and you plan on making a withdrawal from your RRSP, you might as well withdraw the funds from your RRIF instead. By withdrawing at least $2,000 from your RRIF, you will be eligible for the pension credit, which will save you a few hundred dollars on your tax return.

You don’t have to convert your entire RRIF, you could just move $2,000 from your RRSP to a RRIF to qualify for this benefit.

 

Additionally, any withdrawals from an RRIF after the age of 65 are eligible to be split with a spouse, whereas RRSP withdrawals cannot be split.

This provides for additional tax planning opportunities, such as doubling the pension credit. By withdrawing $4,000 out of a RRIF, half can be split with your spouse. You would now both be eligible to receive the pension credit.

 

When is the best time to convert your RRSP to a RRIF?

As we just reviewed, there are a tonne of variables that come into play, so it’s important to look at your entire picture.

 

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Marc Sabourin is a Winnipeg-based Financial Advisor and Retirement Specialist with Harbourfront Wealth Management. His specialty is working with pre-retirees and retirees who are looking for retirement, investment, & tax advice. 

Disclaimer: The views expressed are those of Marc Sabourin, Certified Financial Planner, and Investment Advisor, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund