Spousal RRSP at 71: Convert to RRIF or Withdraw

Withdrawing from a spousal RRSP

A spousal registered retirement savings plan (spousal RRSP) is a useful retirement and tax-planning tool. Like a personal RRSP, it allows the account holder to defer income tax until funds are withdrawn. The main difference is that the contributor—the person who makes the deposits and claims the tax deduction—and the annuitant or owner of the plan are different people. In your case, you claimed the deduction when you contributed, but your wife is the account owner.

Because the spousal RRSP is legally your wife’s account, she is the person required to report and pay tax on withdrawals in most cases. This setup is commonly used to shift taxable income between spouses in retirement so that income can be split more evenly and potentially reduce the family’s overall tax bill.

What to do with a spousal RRSP at age 71

By the end of the year an RRSP annuitant turns 71, they are no longer allowed to hold RRSPs. That means your wife must take action before or during that year to convert the plan to another accepted format. She generally has three options:

• Convert the spousal RRSP into a spousal registered retirement income fund (spousal RRIF)
• Purchase an eligible life annuity that starts paying guaranteed income
• Make a full withdrawal of the RRSP balance in cash or in-kind

An eligible life annuity swaps the RRSP balance for a guaranteed stream of income for life. This can be attractive for someone who values predictable lifetime income, though many people find it psychologically difficult to trade a lump-sum asset for ongoing payments.

Withdrawing the entire RRSP balance in cash is rarely optimal, except for specific short-term needs or when the balance is very small. The full withdrawal amount is taxable in the year it is taken, which can produce a large tax bill and push you into a higher tax bracket.

Most people elect to convert their spousal RRSP into a spousal RRIF. A spousal RRIF requires annual minimum withdrawals based on the annuitant’s age. The first minimum withdrawal must begin the calendar year after conversion. For example, when you convert at 71 the first withdrawal rules and minimum rates apply at the start of the following year (the minimum at conversion is commonly based on government-prescribed factors — for the year referenced in the original example the rate is 5.40% at the conversion point). These mandatory withdrawals are taxable to your wife but are also considered eligible pension income, which may make the income eligible for pension income-splitting with you.

Attribution rules for spousal RRSPs and spousal RRIFs

One important distinction between personal RRSPs and spousal RRSPs is the attribution rule. This rule prevents a contributor from making a spousal RRSP contribution and having the spouse immediately withdraw the funds so that the contributor avoids tax.

Under the attribution rules, any withdrawal from a spousal RRSP will be attributed back to the contributor if the withdrawal occurs within the year of the contribution or within the two previous calendar years. That means money contributed by you that is withdrawn by your wife within that window can be taxed in your hands, not hers. This prevents short-term income shifting.

When a spousal RRSP is converted to a spousal RRIF, attribution rules no longer apply to the minimum required RRIF withdrawals. However, any withdrawal in excess of the RRIF’s minimum annual withdrawal may still be subject to attribution. If you haven’t made contributions to the spousal RRSP in the current year or the two previous years, or if your wife plans to take only the minimum RRIF withdrawals at first, attribution is unlikely to be an issue.

Should you transfer the funds to a TFSA?

You asked whether the RRSP could be transferred directly into your wife’s Tax-Free Savings Account (TFSA). There is no direct, tax-free transfer from an RRSP or RRIF into a TFSA. If your wife takes money out of a RRIF or RRSP, that withdrawal is taxable in the year it is received. After paying the tax, she could then use the remaining cash to contribute to a TFSA, provided she has available TFSA contribution room.

Using RRIF withdrawals to fund a TFSA can be a smart move if you don’t need the RRIF income for living expenses and your wife has unused TFSA room. Once money is inside a TFSA, future investment income and withdrawals are tax-free, which can help reduce taxes in later years. Just be mindful of TFSA contribution limits and avoid overcontributing, which can trigger penalties.

Read more from Ask a Planner:

• How spouses with joint accounts should claim capital losses
• How much to take out of your RRSP in your 60s
• Is now the time for retirees to sell stocks and buy GICs?
• Financial planning in your 70s