Should You Take Extra RRIF Withdrawals to Grow Your Estate?

Most tax-efficient way to withdraw from a RRIF

When you convert a registered retirement savings plan (RRSP) into a registered retirement income fund (RRIF), you must begin taking annual minimum withdrawals. The conversion has to be completed by the end of the year you turn 71. The required minimum is calculated as a percentage of the RRIF’s value at the end of the previous year and increases with age. Although RRIFs set a minimum withdrawal amount, they generally do not impose a maximum, except for locked-in plans that originated from employer pensions.

Locked-in accounts that come from pension plans are typically subject to different rules and often must be converted to a life income fund (LIF) or similar locked-in vehicle depending on federal or provincial pension legislation.

Should you consider extra RRIF withdrawals?

Yes — it’s worth considering additional RRIF withdrawals in certain circumstances. That might seem counterintuitive given the usual advice to defer taxes for as long as possible, but withdrawing more and paying tax sooner can sometimes reduce the overall tax bill your estate will face on death.

To illustrate, consider a hypothetical case. This example won’t match every situation exactly, but it highlights the trade-offs to consider.

• Woman, age 80, single, resident of British Columbia.
• RRIF balance approximately $250,000.
• Substantial available TFSA contribution room.
• Assumed investment return of 4% per year.
• Receives about 75% of the maximum Canada Pension Plan (CPP) benefit and the full Old Age Security (OAS) pension.
• Modest monthly spending of about $3,000, covered by CPP, OAS and RRIF withdrawals.

In her 80th year, the minimum RRIF withdrawal would be roughly $16,000. However, she could withdraw about $27,000 and still remain within a relatively low combined federal and provincial marginal tax bracket. The extra after-tax funds could be directed into TFSA contributions, for example roughly $9,000 a year, which would then grow tax-free rather than tax-deferred inside a RRIF.

If she followed this strategy and died at age 90, the TFSA could hold around $117,000 and the RRIF would have roughly $3,000 remaining, giving about $120,000 in assets that are largely free of tax at death. By contrast, if she took only minimum RRIF withdrawals over the same period she might end up with about $158,000 in her RRIF but little or no TFSA savings. That larger RRIF balance would be taxable on her final return, potentially resulting in a substantial tax bill—perhaps tens of thousands of dollars—depending on timing and other factors.

At first glance, holding a larger RRIF might appear preferable because of tax deferral, but when the account is fully taxable on death to non-spousal beneficiaries, moving assets into a TFSA where they can pass tax-free can be an estate planning advantage.

What happens to your RRIF when you die

Unless you designate a spouse as the successor annuitant or beneficiary, the full RRIF balance is included as income on your final tax return and is therefore fully taxable. The amount of tax owed depends on the total income in the year of death and on the available deductions and credits. Timing within the year matters: death earlier in the year can mean less taxable income from the RRIF, while death late in the year may increase the tax liability.

Using the earlier example, if the holder took only minimum withdrawals and died at age 90, the estate could face a tax bill in the range of approximately $40,000 to $50,000 on the RRIF. If, instead, the holder had trimmed the RRIF by making larger withdrawals during life and built TFSA savings, the taxable exposure at death could be much smaller or effectively nil.

For those whose retirement income mainly comes from government pensions and whose RRIF is their primary non-housing asset, the difference between withdrawing only the minimum and taking extra withdrawals may not be decisive. However, for people with larger RRIFs, higher incomes, or more years to exploit lower tax brackets, accelerating withdrawals to take advantage of lower marginal rates and moving money into tax-free accounts can reduce taxes at death and increase the amount left to beneficiaries.

Who to consult—and what to ask

Discussing this strategy with your financial advisor, accountant and estate lawyer is important because the best approach depends on your full financial picture. Advisors often focus on investments, accountants on annual tax compliance, and lawyers on drafting wills; each professional may not automatically analyze the specific tax implications of RRIF withdrawal timing. Ask directly: “Would taking larger RRIF withdrawals now reduce the tax my estate will owe at death?”

In some situations — for example, when a person has a shortened life expectancy — families deliberately accelerate RRIF withdrawals to reduce the tax burden on the estate. Such strategies must be tailored to individual circumstances, and the numbers should be run for your specific situation before making changes.

If you manage your own finances, remember that tax deferral is not the same as tax reduction. Over the course of your life, the goal might be to minimize total taxes paid rather than to maximize tax deferral alone. Considering RRIF withdrawals in the context of available TFSA room, pension income, expected longevity and estate goals can reveal opportunities to reduce taxes overall and to leave more to your beneficiaries.

Read more about estate planning

• What happens to a RRIF when the account owner dies?
• Can you transfer a RRIF to a TFSA—and what are the tax implications?
• RRSP to RRIF, and LIRA to LIF: How it all gets done
• How to cope with the RRSP-to-RRIF deadline in your early 70s