You’ve spent years building up your RRSP and now you’re ready to enjoy retirement. Maybe you’re planning to travel, golf, or spend more time with the grandkids. But what actually happens to your RRSP once you stop working?
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If You Don’t Need the Money Right Away
Let’s say you’re 63 and have other sources of income. You can leave your RRSP alone for now. But by the year you turn 71, you’ll be required to convert it into a RRIF, or Registered Retirement Income Fund.
Starting at age 72, you’ll need to begin making annual withdrawals. These minimum withdrawals increase each year as you age. For example, it starts at 5.4 percent at age 72 and gradually rises to 11.92 percent by age 90.
You can always withdraw more than the minimum, but you can’t take out less once the withdrawals begin.
If You Need Money Before 65
If you need funds before age 65, you can simply withdraw money from your RRSP. For example, if you need $30,000, you can take that amount directly out. You’ll pay tax on it, but there are no restrictions on how much you can withdraw.
Why Age 65 Is a Key Milestone
At age 65, it might make sense to transfer a portion of your RRSP into a RRIF, even if you don’t convert the entire account.
Here’s why. RRIF withdrawals after age 65 can qualify as pension income. If you don’t have a workplace pension, this could unlock the pension income tax credit. Between you and your spouse, this credit could save you $500 to $1,000 in taxes each year.
To take advantage of this, you might move just enough into your RRIF to cover the withdrawals you plan to make anyway. That way, you keep control and maximize tax efficiency.
Be Careful of a Future Tax Problem
bills in the future. We often see retirees forced to take out big RRIF withdrawals in their seventies, which can push them into a higher tax bracket.
If you’re not careful, you could face what we call an RRSP tax bomb. That’s why it can be worth exploring early withdrawal strategies to smooth out your taxes over time.
Final Thoughts
RRSP withdrawals can feel confusing, but a little planning can help you avoid costly mistakes. Whether you’re deciding when to convert to a RRIF or how much to withdraw each year, the right strategy can keep your taxes low and your income steady.
At Trans Canada Wealth, we help retirees turn their savings into steady, tax-efficient income for life. If you’d like to explore your options, visit our website and book an appointment with us.
