When planning for retirement, Canadians often turn to registered retirement savings plans (RRSP) as a tax-advantaged option to grow their money. After all, RRSPs are designed to help you accumulate retirement wealth.

However, as you near retirement, knowing when and how to convert your RRSP into income using a Registered Retirement Income Fund (RRIF) can ensure a steady income stream throughout your golden years. We’ll cover those details in this article, but first, here’s a closer look at the differences between RRSPs and RRIFs.

RRSP Vs. RRIF: What’s the Difference?

RRSPs and RRIFs have some similarities. Both are tax-deferred retirement accounts and allow you to assign beneficiaries, you must pay withholding tax on withdrawals, and you can invest your money in a number of ways.

But RRSPs and RRIFs are not the same thing, which is why it’s important to understand the differences.

An RRSP is a savings plan designed to help you save money for retirement. You contribute to the plan during your working years, and your investments grow tax-deferred. This means you don’t pay taxes on the growth within the plan while the funds remain in the RRSP. You can choose from various investment options, such as GICs, mutual funds, ETFs, stocks, and bonds.

On the other hand, a RRIF is meant to provide income during retirement. You must convert your RRSP into an RRIF by the end of the calendar year in which you turn 71. While the types of investments held within an RRSP and an RRIF can be the same, there are some key differences.

1. Withdrawal Rules

You are not required to withdraw from an RRSP, but with a RRIF, you must take minimum withdrawals each year. The annual minimum withdrawal is based on your age and the balance in your RRIF account. If you are married and your spouse is younger than you, you may be able to use your spouse’s age to determine your minimum withdrawal amount. This can reduce the required amount and help you defer taxes longer.

2. Flexibility of Withdrawals

Both types of accounts allow you to withdraw, but RRIFs offer more convenient withdrawal options. Most RRIF accounts allow you to set up automatic monthly, quarterly, or annual payments. RRSP plans don’t offer this flexibility and only allow you to make manual, lump-sum withdrawals.

3. Tax Treatment

Both RRSPs and RRIFs are tax-sheltered, but with an RRSP, your contributions are also tax-deductible. You cannot contribute to a RRIF, so there is no tax deductibility.

When Do I Need to Do a RRSP to RRIF Conversion?

You must convert your RRSP to a RRIF by December 31st of the year in which you turn 71. For example, if you turn 71 in July of 2024, you must convert by December 31, 2024.

Penalty for Not Converting RRSP to RRIF

If you don’t by the deadline, the CRA will treat your entire RRSP savings balance as taxable income that year. Depending on your overall income and the balance in your RRSP, it could result in a substantial tax penalty.

Can I Convert My RRSP to RRIF Early?

You can switch your Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF) as early as age 55. Doing so may be beneficial if you’re nearing retirement and require a periodic income stream.

If not, it’s generally better to leave your money in the RRSP and occasionally withdraw if you don’t need the regular income yet. Keep in mind that there are other scenarios where converting to a RRIF earlier than 71 might make sense. Everyone’s situation is different, so it’s best to consult a financial planner who can help you make the right decision.

Can I Make a Partial Conversion of RRSP to RRIF?

Yes, you can partially convert your RRSP to a RRIF, as long as it’s before the age 71 deadline. Instead of collapsing the entire RRSP, you would transfer a specific portion to a RRIF while keeping the remaining balance in your RRSP.

How Do I Convert My RRSP to a RRIF?

The process of transferring an RRSP into a RRIF is a straightforward procedure that your financial institution can assist you with. In fact, if you haven’t taken any action leading up to the age 71 deadline, your RRSP issuer will likely reach out to you to remind you to make the conversion.

When converting your account to a RRIF, you’ll be asked to choose a payment schedule. You can opt only to receive the minimum annual payment, or you can take a larger amount on a regular basis, such as monthly or quarterly.

If you’ve decided to open your RRIF at a different bank or credit union than where you have your RRSP, remember that you’ll need to make the RRSP to RRIF conversion before or after transferring between institutions.

RSP to RRIF Conversion Tips

Here are some tips to help you navigate the RRIF conversion process:

• Ensure that you convert your RRSP to a RRIF by December 31st of the year you turn 71
• Consider using the younger spouse’s age for the minimum RRIF withdrawal calculation
• Beware of the tax implications of RRIF withdrawals
• If you can, claim the pension income amount to reduce taxes
• Transfer RRSP funds directly to your RRIF account (financial institutions help with this)

Final Thoughts on Converting Your RRSP to RRIF

Converting your RRSP to a RRIF will make it easier to manage your retirement finances, minimize taxes, and continue to generate growth from your investments. The biggest thing to remember is that you must make the conversion by December 31st of the year you turn 71, or you could be subject to significant tax penalties. Also, remember that each person’s financial situation is unique, so always obtain professional advice about when you should make the switch from RRSP to RRIF.

FAQs

What is the minimum age to convert an RRSP to a RRIF?

You can convert your Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF) and begin withdrawing money as early as age 55, but you must convert no later than December 31 of the year you turn 71. After conversion, you must withdraw a minimum amount from your RRIF in the following calendar year, and you will pay tax on the money you withdraw.

Do taxes apply when converting an RRSP to a RRIF?

Converting your RRSP to a RRIF is not a taxable event. It simply involves transferring your existing investments from one account type to another. However, withdrawals from your RRIF will be subject to withholding tax, and you’ll have to report the withdrawal amount as income on your tax return the following year. Remember that when you withdraw, it is considered income, so any amount you take out may affect your tax bracket and any government benefits you receive.

Is there a benefit to converting an RRSP to a RRIF early?

If you need to draw income from your investments before you turn 71, converting your RRSP to a RRIF early can be a good option. RRIFs make it easier for you to control the timing and amount of your withdrawals, which can be helpful for managing taxes and other financial considerations.