Reconsidering RRIF utilization in early retirement

As you get closer to retirement, you most likely will spend more and more time crunching numbers and doing retirement income planning. I previously wrote about how to convert RRSP to RRIF and the rules for the Registered Retirement Income Fund. In it, I noted why the RRIF is a useful account for steady retirement income after you turn 65.

In that article, I didn’t go in depth on pension income splitting and other topics on why the RRIF might be a useful account for early retirement. An important key fact to know about it is that in 2007, the Canadian government introduced the ability to split pension income. This effectively allows spouses or common-law partners to split eligible pension income and potentially reduce their overall tax liability.

Before pension income splitting was available, if one spouse had a higher income than the other, the effective way was to use a spousal RRSP and try to ensure similar RRSP amounts between you and your spouse/common-law partner by the time you both retire and start withdrawing from the RRSP or the RRIF. Since the introduction of pension income splitting, a spousal RRSP isn’t as useful for retirement income planning purposes. However, a spousal RRSP still provides benefits, especially if you plan to make early RRSP withdrawals before age 65.

I thought it would be worthwhile to go through our RRSP and RRIF utilization plan and how we are reconsidering the RRIF utilization in early retirement. 

What is a Registered Retirement Income Fund (RRIF)?  

One can consider the Registered Retirement Income Fund as an extension of the RRSP. After you “save” for retirement, you need to “spend” in retirement, and that’s exactly what the RRIF is for. A RRIF is used as a source of income during retirement through systematic withdrawals each year.   

Since the RRIF is used for spending, you can’t contribute to it. Once you convert an RRSP to a RRIF, the Canadian government requires a minimum withdrawal every year. The annual withdrawal amount is based on a percentage of the market value of your RRIF as of the last day of the preceding year. The withdrawal amount is taxed at your marginal tax rate (as working income, just like RRSP withdrawals). 

Like a RRSP, income and earnings inside an RRIF are not taxed, so they can continue to grow tax-free. Further, while you cannot contribute to an RRIF, you can earn dividends and interest. You only get taxed when you make an RRIF withdrawal.  

Rules for RRIF

One must convert an RRSP to an RRIF by the end of the calendar year in which the owner turns 71. The first RRIF withdrawal must come out in the following calendar year. When you convert an RRSP to an RRIF, all the investments inside the RRSP can be transferred in kind to the RRIF. In other words, you don’t have to liquidate your investments in the RRSP before converting to RRIF.

Despite the 71 conversion rule, you can convert an RRSP to an RRIF at any time before then. Once you set up an RRIF, you must withdraw the mandatory minimum amount every year, starting the year after the RRIF is established. 

For a RRIF, there’s a minimum amount withdrawal requirement each year. You can always withdraw more than the minimum amount, but part of the amount over the minimum amount will be subject to a withholding tax.  

The annual minimum withdrawal amount (some financial institutions use the term minimum payment) is based on a few factors: when the RRIF was established, your or your spouse’s age, and the RRIF amount. 

The minimum withdrawal percentage increases as you get older. 

Age	Annual minimum withdrawal %
65	4.00%
66	4.17%
67	4.35%
68	4.55%
69	4.76%
70	5.00%
71	5.28%
72	5.40%
73	5.53%
74	5.67%
75	5.82%
76	5.98%
77	6.17%
78	6.36%
79	6.58%
80	6.82%
81	7.08%
82	7.38%
83	7.71%
84	8.08%
85	8.51%
86	8.99%
87	9.55%
88	10.21%
89	10.99%
90	11.92%
91	13.06%
92	14.49%
93	16.34%
94	18.79%
95+	20.00%

One thing to note is that there’s not much benefit in converting a RRSP to a RRIF before age 65. Age 65 is important because from that point on, income from RRIF withdrawals is considered eligible pension income. This allows you to do pension income splitting and you’re eligible for the pension income tax credit. 

Our original plan – Early RRSP withdrawals & collapsing RRSP 

In our original early retirement plan, I planned on pulling money out of our RRSPs and non-registered accounts first and leaving our TFSAs untouched for as long as we could so our money could compound tax-free. This idea was validated by the Cashflows and Portfolios Retirement Projections (thanks, Mark and Joe!) 

• Revisit our Financial Independence Assumptions 

We planned to make regular early RRSP withdrawals, pay for the withholding tax, and slowly reduce the money in our RRSP accounts. To avoid dealing with the RRIF conversion and mandatory withdrawals, we planned to collapse our RRSPs before age 71.

Last year, in 2024, we received $57,412.72 in dividends. $16,246.56 of that amount was from our RRSPs. Between Mrs. T and me, the breakdown was $9,415.48 for me and $6,831.12 for her or roughly a 60-40 breakdown. Based on my 2025 dividend income projection, our RRSP dividend income would be $9,390.04 for me and $8,038.25 for Mrs. T. 

Note, my RRSP dividend income for 2025 appeared to be lower than the 2024 amount because I closed out some USD positions and reinvested money in QQQM, which has a low yield. 

We use a 1 to 1 exchange rate for USD and CAD to avoid exchange rate fluctuation. 

Based on our 2025 RRSP dividend income, we would get hit by a 20% withholding tax upon withdrawal.

We anticipate our RRSP income to continue to grow until we start making withdrawals in early retirement. If we each withdraw $10,000 to $15,000 each year from our RRSPs (so $20,000 to $30,000 total), this should help us slowly reduce the RRSP dollar amount over time. Combined with dividend income from non-registered accounts, and some part-time income, we anticipate we will be in the lowest tax income bracket (less than $57,375 for 2025 per person).

We can also withdraw more than what we need and use the excess to top up our TFSA accounts. This plan means we would take a one-time income tax hit but it would allow the money to compound inside the TFSA tax-free and any future TFSA withdrawals would be tax-free as well. 

The plan is to deplete our RRSPs before age 71 and move the money from our RRSPs to either our TFSAs or to non-registered accounts. This means we wouldn’t have to worry about the RRSP to RRIF conversion and the mandatory withdrawal rules. 

Pension splitting

It is important to note that pension income splitting is possible starting at age 65 and an individual may claim up to a $2,000 credit from a reported eligible pension (i.e. RRIF income). Based on the lowest federal tax bracket of 15%, a $2,000 credit means a saving of $300 per year. 

Since neither Mrs. T nor I have a work pension, it may be worthwhile to consider converting a portion of our RRSPs to RRIFs and drawing $2,000 a year each from our RRIFs to maximize the pension income tax credit. However, if we were to implement this tax-saving strategy, we must be in the lowest tax bracket and limit our pension income to $2,000 or below (higher tax bracket means we would save less than $300). 

Based on the 4% RRIF withdrawal rate at age 65, it means we would need to convert $50,000 worth of RRSP to RRIF (and ensure the fair market amount stays under $50,000 when we calculate the fair market value of the RRIF). 

Age	Annual minimum withdrawal %	Withdrawal amount	RRIF Amount
65	4.00%	$2,000	$50,000.00
66	4.17%	$2,000	$47,961.63
67	4.35%	$2,000	$45,977.01
68	4.55%	$2,000	$43,956.04
69	4.76%	$2,000	$42,016.81
70	5.00%	$2,000	$40,000.00
71	5.28%	$2,000	$37,878.79
72	5.40%	$2,000	$37,037.04
73	5.53%	$2,000	$36,166.37
74	5.67%	$2,000	$35,273.37
75	5.82%	$2,000	$34,364.26
76	5.98%	$2,000	$33,444.82
77	6.17%	$2,000	$32,414.91
78	6.36%	$2,000	$31,446.54
79	6.58%	$2,000	$30,395.14
80	6.82%	$2,000	$29,325.51
81	7.08%	$2,000	$28,248.59
82	7.38%	$2,000	$27,100.27
83	7.71%	$2,000	$25,940.34
84	8.08%	$2,000	$24,752.48
85	8.51%	$2,000	$23,501.76
86	8.99%	$2,000	$22,246.94
87	9.55%	$2,000	$20,942.41
88	10.21%	$2,000	$19,588.64
89	10.99%	$2,000	$18,198.36
90	11.92%	$2,000	$16,778.52
91	13.06%	$2,000	$15,313.94
92	14.49%	$2,000	$13,802.62
93	16.34%	$2,000	$12,239.90
94	18.79%	$2,000	$10,643.96
95+	20.00%	$2,000	$10,000.00

Based on the table above, the math roughly works out but that’s considering the RRIF portfolio value stays flat throughout the year (i.e. no portfolio return). This is fairly unlikely unless we encounter a consistent bear market where our RRIF portfolio value either stays flat or decreases each year. 

Therefore, we most likely would end up needing to withdraw more than $2,000 based on the annual minimum withdrawal percentage. In other words, we would be subjected to a withholding tax on the amount exceeding $2,000. Since $300 isn’t a large amount of money in the grand scheme of things, perhaps it’s silly to “optimize” the withdrawals just for the pension income credit. Rather, I think we should focus on withdrawing the amount we need to supplement our expenses.

Since pension income splitting is allowed at age 65 and my RRSP amount will most likely be much higher than Mrs. T’s, a more prudent solution would be to convert a portion of my RRSP to an RRIF in the calendar year I turn 65, then make regular RRIF withdrawals the year after. With TFSAs, non-registered accounts, RRSPs, and RRIFs, we would aim to withdraw money from these accounts so our “taxable income” is roughly the same. We would also ensure our taxable income is in the lowest bracket for maximum tax efficiency and avoid any Old Age Security (OAS) clawbacks.

Because we’re only in our early 40s, we can postpone the RRSP to RRIF conversion and any RRIF withdrawal decisions when we are in our late 50s or early 60s. By then, we should have a better understanding of most of the numbers, allowing us to make more educated decisions.

The important thing I realized is that collapsing our RRSPs early may not be the most tax-efficient strategy. We may need to consider converting a portion of our RRSPs into RRIFs and take advantage of the pension income splitting and the individual $2,000 pension credit. 

Summary – Reconsidering RRIF utilization with early retirement 

Pension income splitting, which the Canadian government introduced in 2007, is another way to reduce our tax liabilities during early retirement. Although we planned to collapse our RRSPs before age 75, the ability to split pension income means we need to reconsider this plan and re-crunch some numbers as we get closer to age 65.

In our early 40s, it might be a bit premature to decide on our RRSP/RRIF approach. But having a plan and spending time thinking about potential strategies is better than no plan at all.

Dear readers, do you have any RRSP/RRIF utilization plans in retirement?