When Do You Have to Convert RRSP to RRIF – How To and at What Age

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You have spent many years saving for your eventual retirement. If you’re looking to convert your RRSP to a an RRIF, then you’re ready to begin enjoying the benefits which come with all this hard work.

You’ve reached a point where you are ready to take the reins of your life and live it on your own terms.

An RRIF or Registered Retirement Income Fund, is an extension of your RRSP, or Registered Retirement Savings Plan. You’ve been using the RRSP to save money for your retirement. You’ll now be using the RRIF to draw income systematically during your retirement years.

With an RRIF, you have access to the same tax-deferred growth and investment options that are available through your RRSP. Once you’ve converted the account from an RRSP to RRIF, however, you can no longer make contributions to the account. You will also be required to make an annual minimum withdrawal, per whatever the current regulations happen to be.

The funds you do withdrawal from an RRIF are considered taxable income.

How to Convert an RRSP to an RRIF

You are permitted to convert the holdings in your RRSP to an RRIF at any time. The only requirement is that the RRSP must be converted to an RRIF by the end of the calendar year in which you reach the age of 71.

For those who have a birthday in December, that means the calendar year ends on 12/31. Even if your birthday is on December 31st, you must convert the RRSP to an RRIF before the year expires.

You have the option to convert the RRIF to an annuity or take a lump-sum payment if you prefer.

For those who decide to convert to an RRIF, your payments are not required to begin until next calendar year.

That means you can convert the RRSP to an RRIF in January of 2018, then take your first scheduled payments as late as December 2019. The rule is that your first scheduled withdrawal is not required to begin until the calendar year which follows the year the RRSP account was converted to an RRSP.

How to Calculate Your Minimum Required Payment

Once your account is an RRIF, you are required to take an annual minimum withdrawal to keep the account in good standing. When it is converted, you are permitted to withdraw whatever portion of the RRIF you want, assuming that you meet the minimum withdrawal required for each calendar year.

To calculate what your minimum payment must be, you must consider the year when the RRIF was created, the age of yourself or your spouse, and the amount that is currently in the account.

If you are younger than 71 when making this calculation, then the minimum payment is calculated by taking the current market value of the RRIF on January 1 of that calendar year, then multiplying that by 1 over 90 – the age you were on January 1 of the current year.

After the age of 71, the minimum payment calculation is based on a percentage of the market value of your RRIF. This percentage is set by the government of Canada and is subject to change. At the moment, the current percentages apply to all RRIF established on January 1, 1993 or after.

Your first minimum amount, at age 71, is 7.38% of the account. This percentage continues to climb until you reach the age of 94. At that age, you are required to take a minimum withdrawal of 20% each year.

What Happens of the RRIF Goes to an Estate?

Should an RRIF outlast the individual ownership of the account, then whatever funds remain within it become taxable income as of the date of the individual’s death. Exceptions apply if you have a spouse, children under the age of 18, or grandchildren under the age of 18 who were dependent upon you financially.

The Canadian government permits the funds from an RRIF to be transferred to another RRSP or RRIF that your spouse controls without a tax penalty. You’re also permitted to transfer the remaining funds to a child with a disability without triggering taxable income.

For children without disabilities below the age of 18, the only way to avoid the taxable income trigger is to purchase annuities.

Strategies to Consider When Looking at the RRSP vs RRIF

Because all RRIF payments are treated as taxable income when they are distributed, they will be added to your other income for taxation purposes. That means you’re required to withdrawal funds that will be taxed once you complete the conversion.

It is because of this rule that choosing the correct time to convert your RRSP to an RRIF is important. If you take payments earlier than they are needed, or your payments are more than you require, then you might be placed into a higher tax benefit.

Once the funds are withdrawn from the RRIF, you will lose the ability to achieve tax-deferred growth for your future retirement needs.

If you do not require the full amount of your minimum payment, even though it is required that you take it, you can deposit what is not needed into a tax-free savings account. For this option, you will want to speak with your financial advisor about the process and how your unique situation may benefit from it.

In some situations, when a spouse is several years younger, then it may be better to base the minimum payments off of their age instead of your age. That will reduce the amount of the minimum payment that must be taken, allowing you to keep more of your account in a tax-deferred status, so it can continue to grow.

There are also income-splitting options that are available with eligible pensions and RRIF accounts that may reduce your final tax obligations at the end of the year. This is an important consideration because the total income you report can impact other government benefits for which you may be eligible, including Old Age Security.

How to Finalize the Conversion

To convert your RRSP to an RRIF, you must notify the holder of the account about your intentions. Then you must decide on what type of payment you will eventually take from the account.

If you decide to take the lump-sum payment to clear out the account, then the conversion to an RRIF will close out the account. This option should only be considered if you have a large financial obligation to meet. Keeping your money in a tax-deferred state will help fund more of your retirement in most situations.

For further questions, ask the financial institution holding your account or speak with a qualified financial professional.