As you approach retirement, all those years of contributing to RRSPs are finally going to pay off. However, you’ll need to start making arrangements to start withdrawing money from your savings rather than adding to them. To do that, you’ll need a complete understanding of why you have to convert your RRSP to a RRIF.
Once you stop working, you’ll need a constant source of retirement income, and the money saved in your RRSPs will probably make up a considerable amount of it. When it comes time to start withdrawing from your RRSP, you will basically have three options:
- Withdrawing the cash
- Converting your RRSP to an annuity
- Converting your RRSP to a RRIF
If you withdraw the cash, you will pay a lot in tax, because the money you withdraw from an RRSP is considered income. You’ll pay tax on the whole amount, which could also put you in a very high tax bracket. While an annuity would provide you with a constant source of income, you don’t get to decide how the money is invested. This is why many Canadians prefer the third option, of converting RRSPs to RRIFs.
In this article, we’ll go over the process to transfer an RRSP to a RRIF, and we’ll answer some frequently asked questions, such as; what is the typical RRSP to RRIF age; when do you have to convert an RRSP to a RRIF; what are the RRSP to RRIF rules in Canada; what are the RRSP to RRIF tax implications; is an RRSP to RRIF calculator useful; how does a spousal RRSP to RRIF work; and can a RRIF be converted back to an RRSP?
What is the typical RRSP to RRIF age in Canada?
If you decide to transfer your RRSP to a RRIF, there is no RRSP to RRIF age minimum as such, so you can in theory transfer your RRSP to a RRIF at any age. However, most people wait until they are in retirement before they transfer their RRSP to a RRIF. A typical RRSP to RRIF age is therefore 65-plus.
When do you have to convert an RRSP to a RRIF? RRSP to RRIF rules in Canada state that you must convert your RRSP to a RRIF by the last day of the year in which you turn 71. You then have to start withdrawing from your RRIF the following year.
It can take some time to arrange for the transfer of your RRSP to a RRIF, so you should plan this well in advance. If you don’t transfer your RRSP to a RRIF by the end of that year, there could be some considerable RRSP to RRIF tax implications.
It’s worth noting that you don’t have to sell the investments held in your RRSP. You can simply transfer them into your RRIF.
How to convert an RRSP to RRIF
Since your RRIF will be a new registered plan, you’ll have to submit an application to your chosen financial institution to open one. If you’re staying with the same financial institution that currently holds your RRSPs, converting an RRSP to a RRIF is a fairly easy process. Some banks or credit unions may even start the process for you, as you approach your 71st birthday, and prepare the application for you.
When it comes time for you to transfer your RRSP to a RRIF, simply inform the financial institution that holds your RRSP that you are ready to do this, and they will take care of the details. Part of the process will involve naming a beneficiary, such as your spouse, so that they receive the amount tax-free in the event of your death.
RRSP to RRIF rules in Canada
When you transfer your RRSP to a RRIF you don’t have to pay tax. Any income earned in your RRIF (such as interest, dividends, etc.) is not taxable until you withdraw it. As we mentioned, in the year after converting your RRSP to a RRIF, you have to start withdrawing a minimum amount each year. The money you withdraw from your RRIF is classed as income and taxed accordingly.
The minimum amount depends on your age, is a percentage of your RRIF total balance and increases every year. For example, at age 65, the minimum withdrawal is 4%, but by age 75, that amount has increased to 5.82%. The Canada Revenue website has a table that displays the minimum withdrawal amounts per age.
If your spouse is younger than you, RRSP to RRIF rules in Canada allow you to use their age for the minimum withdrawal calculations, rather than your own. This can be helpful for those retirees who don’t need the full amount of the withdrawals when calculated at their own age, and would rather have their savings last longer.
You have to make this decision before you make the first withdrawal, and you can’t change the calculating age back to your own at a later date.
If you withdraw more than the minimum amount, you will be charged a withholding tax, which your financial institution will automatically deduct from the amount you withdraw. These are the withholding tax rates:
- 10% (5% for Quebec) up to $5,000
- 20% (10% for Quebec) on amounts $5,000 ‑ $15,000
- 30% (15% for Quebec) on amounts over $15,000
Can you convert an RRIF back to an RRSP?
The quick answer is yes, you can convert a RRIF back to an RRSP, but only in certain circumstances. Can a RRIF be converted back to a RRSP if you’re aged over 71? No, you can no longer hold an RRSP after the year in which you turn 71, so you can only convert it back if you’re aged 70 and under.
RRSP to RRIF calculators
Using an RRSP to RRIF calculator can help you to calculate before-tax income and minimum withdrawals. Some RRSP to RRIF calculators can also work out how long the money in your RRIF will last.
Make plans for when you do have to convert your RRSP to an RRIF
It’s really important to have a plan in place for converting your RRSP to a RRIF long before you make the switch. You need to be sure of exactly how much you’ll be able to withdraw and if it will be sufficient to provide you with a comfortable retirement. Your financial advisor should have already built your plan for when it comes time to transfer your RRSP to a RRIF.
Converting RRSP to RRIF at age 71 or after
If you’re still working after age 71, you can still contribute to your spouse’s RRSP if your spouse is under the age of 71 at year-end and you have RRSP contribution room. However, this must happen before the transfer of the spousal RRSP to a RRIF – otherwise you cannot make contributions to any RRIF. When do you have to convert a spousal RRSP to a RRIF? The rules are the same for all RRSPs/RRIFs, so at age 71.
How can a CHIP Reverse Mortgage boost your RRIF retirement income?
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It allows you to cash in up to 55% of your home’s equity in tax-free cash and can be used for any purpose. You can choose to receive it in one lump sum or in monthly payments. The best part is that you don’t have to pay any of the money back until you move out or sell your home, so you won’t have monthly mortgage payments putting a strain on your retirement income.
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