RRSP to RRIF Deadline: What to Do in Your Early 70s

As I mentioned in a previous column on Fred Vettese’s PERC, I’m approaching the point where my registered retirement savings plan (RRSP) must be converted to a registered retirement income fund (RRIF) or annuitized. I turn 71 in early April, which means I have until December 31, 2024 to close out my RRSP. Thousands of baby boomers face the same deadline this year, so I’m sharing what I’ve learned about the conversion process and the decisions retirees typically face.

The latest you can receive your first RRIF payment

Matthew Ardrey, senior financial planner at Toronto’s Tridelta Financial, explains the timing: by the calendar year you turn 72 the government requires that your RRSP be converted to a RRIF and that you withdraw at least the legislated minimum. The minimum payment is calculated from the RRIF’s market value on January 1 and a percentage linked to your age; that percentage rises as you get older. Practically speaking, you must instruct your financial institution to convert your RRSP to a RRIF by December 31 of the year you turn 71, and the first mandatory withdrawals begin the following year at age 72.

At age 72 the minimum RRIF withdrawal is currently 5.4% of the account’s market value as of January 1; at age 71 the rate is 5.28%. By age 95 the minimum rises to 20%, according to Rona Birenbaum, founder of Caring for Clients. Because these minimums increase over time, it’s important to understand how timing affects your taxes and cash flow.

Take the RRSP-to-RRIF deadline seriously: the conversion must be completed by December 31 of the year you turn 71. For me, that deadline is December 31, 2024.

What if you miss the deadline for your RRIF?

Birenbaum warns that if you fail to convert on time the full value of your RRSP could be treated as taxable income in the year you turn 72, potentially pushing you into a much higher marginal tax bracket. For someone with a large RRSP that could mean a huge tax bill in a single year.

One alternative to a RRIF is using RRSP proceeds to buy an annuity from an insurance company, which converts the balance into a guaranteed lifetime income. Many clients prefer a RRIF because it offers greater flexibility than most annuities, but annuities can be a good fit for people who value guaranteed income. It’s also possible to open a RRIF earlier than required, although there are usually few benefits to doing so while still working.

RRSPs vs. RRIFs

RRSPs and RRIFs share some features, but they differ in key ways:

• Both are tax-sheltered accounts and can hold the same types of investments.
• Withdrawals from either are fully taxable as income.
• RRSP contributions are tax-deductible; you cannot contribute to a RRIF.
• RRSPs have no mandated withdrawals, while RRIFs require annual minimum withdrawals beginning the year after conversion.
• RRSPs allow lump-sum withdrawals (with withholding tax at source), whereas RRIFs mandate minimum withdrawals and make it easier to automate regular payments (monthly, quarterly, annually, etc.).

How are RRIFs taxed?

Income received from a RRIF is treated as fully taxable income; there is no dividend tax credit for RRIF payments. Unlike payroll income from which tax is routinely withheld, minimum RRIF withdrawals generally have no withholding tax by default. That can lead to an unexpected tax bill when you file your return and, in some cases, the Canada Revenue Agency (CRA) may require you to make quarterly tax instalments if your net taxes owing exceed $3,000 in a year.

Installment interest and penalties can apply if you miss instalment payments; the applicable interest rate can be substantial. You can request withholding tax on RRIF withdrawals if you prefer to have more tax withheld at source, or you can set aside a portion of the proceeds in a regular savings account to cover anticipated tax liabilities.

Withholding tax rules differ between RRSP withdrawals and RRIF withdrawals. For RRSP lump sums taken before conversion, the typical federal withholding is 10% for amounts up to $5,000, 20% for $5,001–$15,000, and 30% for amounts over $15,000 (with different rules in Quebec). For RRIFs, the minimum withdrawals are not subject to withholding; if you request extra payments above the minimum, withholding is calculated on the total requested amount for the year that exceeds the minimum.

Do RRIFs trigger OAS clawbacks?

Additional RRIF income can also affect Old Age Security (OAS) benefits. If your net income exceeds $90,997, OAS payments are clawed back at a rate of $0.15 for every dollar above that threshold until the benefit is fully recovered.

Income splitting with a RRIF

Couples can mitigate tax consequences through pension income splitting. If you’re 65 or older, RRIF income can be split with a spouse on tax returns, which may lower the couple’s overall tax burden and even preserve eligibility for certain credits. A $2,000 split, for example, can create a pension tax credit for the receiving spouse and might be enough to avoid or reduce an OAS clawback.

Prepping for a RRIF

Planning ahead gives you options. One common tactic is to withdraw some amounts from an RRSP or RRIF before age 72 in years when your overall income is lower, reducing the RRSP balance and therefore lowering future minimum RRIF payments. Another approach is to base the RRIF minimum on your younger spouse’s age, which reduces the required withdrawal percentage.

Conversions don’t have to be all-or-nothing. You can partially convert an RRSP to one or more RRIFs before age 71 if that suits your cash-flow needs. Many people find automated RRIF payments easier to manage than ad-hoc RRSP withdrawals because you can schedule regular payments and set amounts that fit your budget.

Can you change your mind about using a RRIF?

If you open a RRIF early and later decide it was the wrong move, you can convert it back to an RRSP as long as you are 71 or younger. That flexibility can be useful if your taxable income or cash-flow needs change and you want to stop mandated withdrawals before age 72.

Since RRIFs are designed to provide retirement cash flow, align payment frequency with your spending needs: monthly payments for day-to-day expenses, annual withdrawals for big bills, or a December withdrawal to keep money sheltered as long as possible. You can also use withdrawals strategically to fund contributions to a tax-free savings account (TFSA) in years when that makes sense.

The mechanics of conversion

Financial institutions typically notify clients about the RRSP conversion deadline. To convert you’ll complete paperwork at the institution that will hold the RRIF; you can keep your RRSP at the same institution or move it elsewhere. Investments can be transferred directly into the new RRIF, and you can consolidate accounts or open multiple RRIFs—though a single RRIF is usually easier to manage. The forms will ask you to select a payment schedule and whether to base minimums on your age or your younger spouse’s age.

On death, the RRIF’s value is generally taxable as income on the final tax return unless a spouse or eligible financial dependent is designated as beneficiary, which may allow deferral of immediate taxation. Large RRIF balances can be heavily taxed in the final year, so beneficiary planning is important. Locked-in retirement accounts (LIRAs) must be converted to a life income fund (LIF) or an annuity by the end of the year you turn 71, and the rules around LIRA-to-LIF conversions are typically more restrictive.

Fact vs. fiction: Common misunderstandings about RRSP-to-RRIF conversions

Aaron Hector, private wealth advisor with CWB Wealth in Calgary, highlights six frequent misconceptions:

1. Many believe you must withdraw from your RRSP in the year you turn 71. That’s incorrect: you must convert the RRSP to a RRIF by December 31 of the year you turn 71, but the first mandated withdrawal is not required until the following year, when you turn 72.
2. There is no requirement to have tax withheld on minimum RRIF withdrawals, though the income is still fully taxable. Withholding affects only the timing of tax payments, not the total tax owed.
3. If you opt out of withholding on minimum withdrawals, expect a tax bill at filing time. If this happens repeatedly, the CRA may require quarterly instalments. Hector advises estimating your average tax rate from all income sources and setting your withholding to match that rate if you choose to have tax withheld.
4. Choosing a spouse’s age to calculate RRIF minimums is not permanent—you can change that election. In some situations it may even make sense to base minimums on the older spouse’s age to increase required payments.
5. Payment timing is flexible. You must withdraw the annual minimum by year-end, but you can split it across months, take it all in January, or leave most until December—whatever suits your planning needs.
6. If you’re 65 or older, RRIF payments qualify as eligible pension income and can be split with a spouse on both tax returns using Form T1032 when appropriate.

Until next time, when I’ll cover LIRA-to-LIF conversions and annuitization.

Read more Retired Money columns:

• Are GICs worth it for retirees?
• Tontines in Canada: Moving from theory to practice as a solution to our retirement crisis
• How much money do you need to retire in Canada? Is it really $1.7 million?
• Inflation a scourge for retirees? Ottawa’s silver lining(s)