May 4, 2023 · Estate, Financial and Succession Planning

How to Convert RRSP into RRIF In a Tax-Efficient Manner

An image of an Oakville couple who are discussing how to convert RRSP into RRIF in a tax-efficient manner

Planning your retirement begins when you start working. Your retirement planning changes course when you turn 71 and ends on your death. Helping you through the two stages of retirement planning are Registered Retirement Savings Plan (RRSP) and Registered Retirement Investment Fund (RRIF). While RRSP is a tax-deferred account where you deposit money to save for retirement, RRIF is a tax-deferred account where you withdraw throughout retirement. 

Why Should You Convert RRSP Into RRIF? 

The RRSP contributions are tax deductible. But this account ends on December 31 of the year you turn 71. When the RRSP ceases, the Canada Revenue Agency (CRA) treats your entire RRSP saving as income for that year. If you have $1 million in your RRSP, you can imagine the tax liability you will face in the first year of retirement. Tax will eat up a significant amount of your retirement savings. 

You can transfer all your RRSP savings into RRIF tax-free and defer your taxes throughout your retirement. While the tax-free transfer is the key reason to choose RRIF, there are other reasons too: 

  • RRIF allows you to continue holding your investments in ETFs, Guaranteed Interest Options and mutual funds and let your money grow tax-free. The tax is only payable on your withdrawals. 
  • You can decide the withdrawal amount in RRIF, but there is a minimum amount you have to withdraw. The minimum amount depends on your age and the market value of the RRIF.
  • You get some creditor protection if the financial institution where you have RRIF goes bankrupt. 
  • Your RRIF has a beneficiary. If the beneficiary is a spouse, child, or grandchildren, they can receive the balance funds from your RRIF tax fee after your demise. 
  • You can add your RRIF to the estate and add it to your will. 

All these reasons make RRIF the preferred choice for retirees. 

When to Convert RRSP into RRIF and Start Withdrawing Money Tax Efficiently?

While RRIF is a good tool to transfer your RRSP funds and defer taxes, when is the right time to do so? 

The CRA de-registers your RRSP on your 71st birthday. So it is better to convert RRSP into RRIF before you turn 71. Once your funds are in the RRIF, you can start withdrawing money from next year onwards. This is where the next step of tax planning comes in. 

Your RRIF withdrawals are added to your taxable income with other retirement benefits like Old Age Security (OAS), Canada Pension Plan (CPP), and employee pensions. Only Tax-Free Savings Account (TFSA) withdrawals are not taxable. 

How to Withdraw Money From RRIF Tax Efficiently 

As stated before, RRIF has a minimum withdrawal amount that increases with age. For example, when you turn 71, you should withdraw 5.28% of the RRIF portfolio value on December 31 of the previous year. You can determine withdrawal frequency as monthly, quarterly, semi-annually, or annually. 

For instance, you have $1 million in your RRIF, so you withdraw at least $52,800 in your first year. Now you add up the OAS and CPP amount and any side or passive income like rent from property to arrive at the annual taxable amount. There could be two scenarios: you may want to withdraw more money from RRIF, or the minimum RRIF amount is too high. How can you make tax-efficient withdrawals in these scenarios? 

Scenario 1: RRSP into RRIF

You can withdraw more money from RRIF, but the additional amount will carry a withholding tax and lower your RRIF funds. Hence, a better option would be to withdraw an additional amount from your TFSA, as its withdrawals would not add up to your taxable income. 

Scenario 2: RRSP into RRIF

You don’t need the minimum RRIF amount. If you have a younger spouse, you can use their age as the base of the RRIF withdrawal schedule when converting RRSP to RRIF. For instance, if you are 71 and your spouse is 62, you can opt 62 as the age for RRIF withdrawal to reduce your minimum withdrawal amount by nine years. 

Retirement planning and tax planning go hand in hand. It is better to consult a wealth advisor to ensure the wealth you have accumulated all your life doesn’t go away in taxes. 

Contact Glenn Graydon Wright LLP in Oakville to Plan Your Retirement Tax Efficiently 

A skilled financial advisor can help you diversify your retirement fund and secure a decent retirement income for a long time without incurring a significant tax liability. At Glenn Graydon Wright LLP, our tax experts and wealth advisors can provide financial and tax planning services and provide you with recommendations on managing your wealth. To learn more about how Glenn Graydon Wright LLP can provide you with financial planning expertise, contact us today at 905-845-6633, or connect with us online, to set up an initial consultation.