Understanding how to convert RRSP to RRIF

I have written about taking advantage of tax-advantaged and tax-deferred accounts like the TFSA and RRSP at length. TFSA and RRSP are great accounts for investing and growing your investments without having to worry about tax implications in the current year. Therefore, every year, we max out our TFSA and RRSP contribution rooms before contributing to our non-registered accounts. 

• The Millennial’s Ultimate TFSA Guide
• The Millennial’s Ultimate RRSP Guide

The TFSA is an excellent retirement account because all withdrawals are tax-free. This makes tax planning in retirement much easier. 

On the other hand, RRSP withdrawals are fully taxed at your marginal tax rate (as working income). Furthermore, upon withdrawal, some of the amount is withheld for tax reasons. One important thing to know about RRSP is that one must convert your RRSP to a RRIF by the end of the calendar year you turn 71. 

These two factors often give RRSP a bad name and many Canadians believe the RRSP is not an effective vehicle for retirement saving. I completely disagree. I believe the RRSP is a very effective retirement savings account. You just need to plan accordingly. 

Since we are getting close to living off dividends, taking a step back on full-time employment, and working only if we want to, I have been doing more analysis and studying the ins and outs of utilizing the RRSP in early retirement.

One thing I realized is that I know very little about the RRIF – Registered Retirement Income Fund. More specifically, how does one convert RRSP to RRIF, and what are the RRIF withdrawal rules?  

What is a Registered Retirement Income Fund (RRIF)?

As RRSP’s name suggests, the Registered Retirement Savings Plan, an RRSP is used to save for retirement. 

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 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 an 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 an 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.  

Converting RRSP to RRIF

If both RRSP and RRIF withdrawals are taxed at your marginal tax rate as working income and you don’t get any RRIF contribution rooms, why would anyone convert an RRSP to an RRIF?

Well, it lies in one important rule set out by the Canadian government – an RRSP must be converted to an RRIF by the end of the calendar year in which the owner turns 71 (with the first withdrawal coming in the following calendar year). When you convert a 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 that. Once you set up an RRIF, you must withdraw the mandatory minimum amount every year, starting the year after the RRIF is established. 

Generally speaking, there’s no real benefit to converting a RRSP to a RRIF before age 65. People usually convert to a RRIF before age 71 due to reasons such as income needs, tax management, income splitting, pension tax credits, and old age security optimization. 

Needless to say, a lot of calculations are required to decide whether to convert a RRSP to an RRIF before age 71. When it comes to early retirement, one may also want to consider different early withdrawal strategies, as I outlined in a reader discussion: 

• Early Withdrawal Strategies – a reader’s discussion

RRIF Minimum Withdrawal Amount

The Canadian government created the RRIF so Canadians and permanent residents can have a steady income in retirement. As mentioned, once you establish an RRIF, you must withdraw a minimum amount each year. You can always withdraw more than the minimum amount, but there is a minor implication (I’ll cover that later). 

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. 

Before age 71, the minimum withdrawal amount is calculated based on the following formula:

• RRIF market value on January 1st of the current year X  1 / (90 – age on January 1st of the current year) 

Imagine you are 55 on January 1st and your RRIF market value on that day was $250,000. So the minimum withdrawal amount would be:

• $250,000 x 1/(90-55)  = $7,142.86

And the annual minimum withdrawal rate at age 55 is 2.86%. In case you’re wondering, here’s the minimum withdrawal rate between the ages of 45 to 70.

Age	Annual minimum withdrawal %
45	2.22%
46	2.27%
47	2.33%
48	2.38%
49	2.44%
50	2.50%
51	2.56%
52	2.63%
53	2.70%
54	2.78%
55	2.86%
56	2.94%
57	3.03%
58	3.13%
59	3.23%
60	3.33%
61	3.45%
62	3.57%
63	3.70%
64	3.85%
65	4.00%
66	4.17%
67	4.35%
68	4.55%
69	4.76%
70	5.00%

After age 71, the minimum withdrawal amount is determined by the RRIF market value on January 1st,  multiplied by a percentage established by the Canadian government. Note, the age referred to in the RRIF is always the age of the RRIF holder on December 31st of the prior calendar year.

Age	Annual minimum withdrawal %
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%

As expected, the annual minimum withdrawal percentage increases as one gets older. There’s really no benefit to converting RRSP to 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. 

If you’re fortunate enough to have a large RRSP, the mandatory RRIF minimum withdrawal amount could be problematic later on. This is why some people do early RRSP withdrawals and convert their RRSPs to RRIFs before age 71.  

What happens to RRIF when you die? 

Upon the date of the RRIF holder’s death, any remaining money in the RRIF becomes taxable income and is filed in the final tax return. You can defer income tax to a certain point by naming an RRIF successor or beneficiary (or beneficiaries since you can name multiple ones).

A successor of an RRIF can only be your spouse or common-law partner. On the other hand, a beneficiary can be anyone. 

There are a few key differences between a successor and a beneficiary of an RRIF. 

When someone is named as the successor of your RRIF, they take over the entire account when you die. In this scenario, the executor will include on your final tax return the amount you withdrew from your RRIF that calendar year. Any increase in value between the date of death and the date of transfer is taxable to the successor. The successor of your RRIF will then have to follow the RRIF minimum withdrawal amount rule and pay tax on the amount. 

When someone is named as the beneficiary of an RRIF, they will receive the funds from the RRIF. If the beneficiary is your spouse or common-law partner, they can transfer your RRIF above the minimum withdrawal amount to their own RRSP or RRIF without paying any taxes. The minimum withdrawal amount is filed in your final tax return and your RRIF will get closed as a result. Essentially, your RRIF gets rolled over and your spouse or common-law partner won’t have to pay any taxes until they make withdrawals. Now, if the beneficiary is a child or grandchild and is financially dependent on you, they can transfer the RRIF funds to their own RRSP, RRIF, and other registered account. They will get taxed on any withdrawal amount.

Note, you can divide your RRIF between beneficiaries and your estate. 

Is naming an RRIF successor better than naming a beneficiary (or beneficiaries in some cases)? That really depends on your own scenario. Generally speaking, naming a successor is simpler and is typically preferred. But naming beneficiaries can allow you to pass down your RRIF to people other than your spouse or common-law partner. 

RRIF Withholding Tax

When you make an RRSP withdrawal, there’s withholding tax depending on the withdrawal amount. Unlike RRSP, there’s no withholding tax on RRIF minimum withdrawals. 

However, if you withdraw more than the minimum amount, you will get hit by withholding tax. Your financial institution will withhold money as withholding tax for the amount over the minimum RRIF withdrawal amount. 

Here are the withholding tax rates for all provinces and territories except Quebec:

Amount of withdrawal	Tax Rate
$0 – $5,000	10%
$5,001 – $15,000	20%
$15,000+	30%

For Quebec:

Amount of withdrawal	Tax Rate
$0 – $5,000	5%
$5,001 – $15,000	10%
$15,000+	15%

Note 1: These rates are the same as RRSP withholding tax rates.

Note 2: Quebec residents are subjected to a provincial withholding rate of 14% on top of the rates above.

Note 3: If you’re a non-resident of Canada, the withholding tax rate is a flat 25%.

It hurts to get hit by withholding tax but the tax withheld will be credited against your taxes owing when you file for income tax. 

Using the age of the spouse & common-law partner

If your spouse is younger than you, you can elect, prior to making any RRIF withdrawals, to use the age of your spouse or common-law partner in calculating the minimum withdrawal amount. 

Typically, when your spouse or common-law partner is younger than you, this can result in a lower withdrawal amount. It’s important to note that once this RRIF election has been made, it cannot be changed. 

Important RRIF considerations

Since the RRIF is meant to provide steady retirement income, it is important to consider how much you need to withdraw each year. Do you withdraw the minimum amount? Or do you withdraw more than the minimum amount and face withholding tax? 

And because the yearly withdrawal amount is calculated using the RRIF market value on January 1st, do you try to spread out the withdrawals and try to time them when the market is up? Or you simply establish a regular withdrawal cadence (like quarterly or bi-annually) and stick with that? Obviously if your financial institution charges RRIF withdrawal fees, you need to include the fees in your calculation. 

Another important RRIF consideration is the tax consequences. If you withdraw earlier than needed or take out a higher amount than needed, you not only get hit with withholding tax, but you could also end up in a higher marginal tax credit. This could potentially result in clawback for Old Age Security and other government benefits.

Finally, since the RRIF is one of the sources for retirement income, it is important to consider what kind of investments to hold. Do you hold 100% equities in an RRIF? Or a mix of investments that some will provide long-term growth (like stocks) and some will provide income stability (like bonds and GICs). 

Summary – Understand how to convert RRSP to RRIF

Previously, I didn’t pay too much attention to the RRIF. I have always planned and considered collapsing my own and Mrs. T’s RRSPs before age 71 to avoid converting our RRSPs to RRIFs and following all the RRIF rules. However, as I understand more about the RRIF, I am starting to see the benefits of utilizing this retirement income account. 

One thing I didn’t bring up in this article is pension splitting – splitting RRIF income between you and your spouse or common-law partner, which can be an effective way to lower income taxes.

But that’s a topic for a more in-depth post with more calculations later. Stay tuned for that.