When Do You Have to Convert an RRSP to an RRIF?

A Registered Retirement Savings Plan (RRSP) and a Registered Retirement Income Fund (RRIF) are financial tools for retirement. An RRSP is a tax-deferred savings account, allowing contributions to grow without immediate taxation. A RRIF provides income during retirement through regular withdrawals. Eventually, RRSP funds must transition into an income-generating vehicle, most commonly an RRIF.

The Mandatory RRSP to RRIF Conversion Deadline

Canadian tax laws mandate a timeline for converting an RRSP into a RRIF or an annuity. This conversion must occur no later than December 31st of the year an individual turns 71 years old. The Canada Revenue Agency (CRA) strictly enforces this deadline to ensure tax-deferred savings are eventually drawn upon and taxed as income.

Failing to meet this deadline carries significant tax implications. If conversion is not completed by December 31st of the year you turn 71, the entire fair market value of the RRSP is considered withdrawn and added to your income for that year. This immediate taxation can result in a substantial tax burden, potentially pushing income into a higher tax bracket.

While there is a mandatory age for conversion, individuals can convert their RRSP to a RRIF earlier than age 71. Converting earlier can offer benefits, such as leveraging the pension income tax credit or facilitating pension income splitting with a spouse. However, once converted, minimum annual RRIF withdrawals become a requirement.

Choices Before Converting Your RRSP

Before converting an RRSP to a RRIF, individuals have important decisions. One involves converting the entire RRSP balance or a portion, especially if converting before age 71. This allows for a staggered approach to retirement income planning.

Another consideration is converting to a spousal RRIF, particularly if your spouse is younger. Basing minimum withdrawals on the younger spouse’s age can reduce required annual withdrawals, allowing funds to remain tax-sheltered and grow longer. This strategy benefits tax planning and capital preservation.

Naming beneficiaries or a successor annuitant for the RRIF should be addressed before or during conversion. A successor annuitant, who must be a spouse or common-law partner, allows the RRIF to seamlessly transfer to them upon death without immediate tax implications, continuing the income stream. Designating other beneficiaries means the RRIF’s value is generally taxed in the deceased’s estate, though exceptions exist for financially dependent children or grandchildren.

Individuals should also consider their choice of financial institution for the RRIF, even if it’s the same institution holding their RRSP. Consolidating multiple RRSPs into a single RRIF simplifies management of investments, withdrawals, and tax reporting. For those with locked-in retirement accounts (LIRAs), RRIF conversion results in a Locked-in RRIF, with specific regulations regarding withdrawal maximums in addition to minimums.

The Conversion Process

Converting an RRSP to a RRIF typically begins by contacting your financial institution. This could be a bank, credit union, or investment firm holding your RRSP. Most institutions are accustomed to this process and provide guidance.

You will generally complete a new RRIF application form, as a RRIF is a distinct account from an RRSP. This application requests updated personal information and details regarding your desired RRIF setup. You may also need to provide identification and existing RRSP statements to facilitate the transfer.

Upon submission of the completed application and required documentation, the financial institution handles the direct transfer of funds from your RRSP to the new RRIF account. This transfer is usually done without triggering an immediate tax event, as it is a direct rollover. The timeline can vary, but it generally takes a few business days to a couple of weeks.

RRIF Withdrawal Requirements

Once an RRSP converts to a RRIF, specific rules govern withdrawals. Unlike RRSPs, RRIFs require minimum annual withdrawals starting the calendar year following establishment. If conversion occurs at age 71, the first minimum withdrawal is due by the end of the year you turn 72.

The minimum withdrawal amount is calculated annually based on a prescribed percentage of the RRIF’s market value at the beginning of the year (December 31st of the previous year). This percentage increases as the RRIF holder ages. For instance, at age 71, the minimum withdrawal rate is 5.28%, increasing to 5.40% at age 72.

All RRIF withdrawals are taxable income in the year received and must be reported on your income tax return. While the minimum withdrawal amount is not subject to withholding tax at source, amounts withdrawn above the minimum are typically subject to withholding taxes, which vary by amount and province of residence. These withheld taxes are remitted to the Canada Revenue Agency (CRA) and credited against your overall tax liability.