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When you hit 71 in Canada, your retirement savings world changes completely. That RRSP you’ve been building for decades? It has to become a RRIF, and suddenly you’re required to start taking money out whether you want to or not. Getting this transition right can save you thousands in taxes and help your money last longer.
By 31 December of the year you turn 71, your RRSP must convert to a RRIF. There’s no getting around this rule, and once it’s done, you can’t undo it. There are no more contributions allowed, and you’ll need to start taking minimum amounts out every year starting the following year.
But here’s something most people don’t realise: you don’t have to wait until 71. You can make the switch anytime after 65 if it makes sense for your situation. Sometimes getting ahead of the game pays off.
Once you’ve got a RRIF, the government tells you the minimum you need to take out each year. These aren’t suggestions; they are requirements. At 72, you’ll withdraw 5.28% of whatever was in the account on 1 January. That percentage creeps up every year, hitting 20% once you reach 94.
The government designed it this way because they want their tax money eventually. They gave you all those years of tax deferrals, and now it’s time to pay up. The older you get, the bigger chunk they want you to take out.
Maybe. If you’ve already retired and you’re sitting in a lower tax bracket, converting early might actually save you money. Think about it – if you wait until 71, you might be dealing with CPP, OAS, company pension, and RRIF income all hitting at once. That’s a lot of taxable income in one year.
Converting early also gets you access to pension income splitting with your spouse and the pension income tax credit. That credit alone could save you up to $2,000 federally, and your spouse could get the same benefit.
Sure, you have to take the minimum, but nobody’s stopping you from taking more. Whether you should depends on your tax situation and what else you’ve got going on. If you’re in a low bracket now but expect higher taxes later, consider pulling out extra while the rates are friendly. This “bracket management” approach can cut your lifetime tax bill significantly.
On the flip side, if you don’t need the money and want to leave more to your kids, stick to minimums. Keep that tax-deferred growth working as long as possible.
Married? You’ve got some clever moves available. You can base your minimum withdrawals on your younger spouse’s age instead of your own. If there’s a decent age gap between you two, this can really slow down those required withdrawals.
Pension income splitting is another winner. You can shift up to half your RRIF income to your spouse for tax purposes. If you’re in different brackets, this move alone could save you hundreds or thousands each year.
This gets complicated. When you pass away, your RRIF typically gets added to your final tax return as income – unless it goes to your spouse or a financially dependent child. We’re talking about potentially massive tax bills for your estate.
If you’ve got a spouse, they can either take over your RRIF directly or roll it into their own retirement account. This keeps the tax-deferred status going instead of triggering a big tax hit right away.
Here’s a nightmare scenario: the market crashes just when you need to take your minimum withdrawal. You’re forced to sell investments at terrible prices, locking in losses and leaving less money to recover when markets bounce back.
Smart RRIF owners keep some cash on hand specifically for withdrawals, or they build bond ladders that provide steady income regardless of what stocks are doing. It’s like insurance against bad timing.
Retirement planning can be quite complex, and the decisions you make today will have lasting effects for many years to come. I strongly recommend working with a fee-only financial planner who can review your specific situation and walk you through various scenarios. They can help you understand the real costs and benefits of different approaches over time.
It’s also wise to consult with a tax professional – they can help ensure you’re not missing opportunities or making mistakes that could be costly later.
The shift from building your savings to actually using them in retirement represents a significant change in mindset. Your long-term success will largely depend on three key factors: starting your planning early, maintaining flexibility in your approach, and staying prepared to adjust your strategy when tax laws change or unexpected situations arise.
Please note, when thinking about retirement financial options, you should always take independent, professional advice.
