You have done your due diligence over the years and saved for your retirement via a Registered Retirement Savings Plan (RRSP). Whether you are nearing the age to retire or not, it is important for you to learn all the details and rules around converting your RRSP nest egg into real retirement income. The good news is that you do have options. You can either withdraw the entire amount as a lump sum or convert your RRSP into a Registered Retirement Income (RRIF). Most prefer to do the latter, for tax reasons.
Much like an RRSP, a RRIF account is tax-deferred, meaning that money and earnings in this account cannot be taxed by the Canada Revenue Agency (CRA). Canadians can contribute to their RRSP account until they are 71 years of age. After that, you should convert your RRSP into a RRIF; otherwise, the full amount of your RRSP will be paid out in a lump sum triggering a tax bill on the entire amount, perhaps putting you in a higher tax bracket. In fact, a greater taxable income will mean that your tax bill probably increases greatly.
Instead, plan to convert your RRSP into a RRIF before your 71st birthday arrives. This will provide you with a fair amount of flexibility and control over how much income you receive during your retirement years. You can personalize a plan based on your retirement lifestyle.
The first thing you should do is decide how much money you will need during your retirement years, and how long you will need your RRIF withdrawals to last. This may be determined by the size of your RRSP. When it comes to a RRIF, the government has placed rules on the minimum amount you can withdraw each year. This means you must withdraw at least the minimum annually as set out by the government RRIF guidelines. This “minimum” amount is calculated as a percentage of your RRIF account balance at the beginning of every year. The percentage rises as you age.
RRIF account holders can customize how much income is withdrawn. You may take out money on a monthly, quarterly, or yearly basis from your RRIF. Larger amounts can also be withdrawn for major purchases or travel needs. It all depends on your retirement needs and lifestyle.
Another thing to consider is where to invest your RRIF. Most people go with the same financial institution where their RRSP is held; however, for individuals who hold multiple RRSP accounts, this may not work. Many financial experts agree that it is best to consolidate all your RRSPs into one account before you set up your RRIF. It is simply easier to manage.
Whether you decide to stay with your financial institution that held your RRSP or go to a new one, you will need to fill out an application for your RRIF conversion. You will also need to make some key decisions around this account, including choosing a beneficiary (whether that be a partner, child(ren), or other relatives), and determining a withdrawal schedule.
Please note that you can start taking money out of your RRIF one year after you turn 71. All RRIF withdrawals are considered taxable income; however, there is a silver lining in that you probably are at a lower taxable income tax rate than when you actually “earned” this money.
As stated earlier, the government rules around RRIFs do require a minimum amount withdrawn annually, starting at the age of 72. As the rules changed around minimum annual percentage withdrawals on RIFFs that were converted after 1992, and then once again in 2015, it is vital to review these numbers before filling out your application. Here is a chart outlining all the years and minimum RRIF annual percentages.
If possible, try to withdraw as little of your RRIF at the beginning, as possible. Not only do you want to avoid running out of funds, but also you want to take advantage of the tax deferral. Taking out this money turns it into taxable income, so if you do not need the funds, why withdraw? Doing so will ensure you keep that retirement nest egg as large as possible, plus save you some money when tax season comes along. You have worked your entire life to build up these retirement funds, and while you want to enjoy the fruits of your labor, you also want them to last as long as possible.