When to convert your RRSP to a RRIF — and how to sequence pensions, CPP and RRSPs

An RRSP must be wound up by December 31 of the year you turn 71. You have three options: cash it out entirely (almost never sensible — the whole amount is taxable in one year), buy an annuity, or transfer it to a Registered Retirement Income Fund (RRIF). Most Canadians choose the RRIF because the transfer itself is tax-free and the investments move across untouched.

A RRIF is the same portfolio in a new wrapper with one added rule: every year you must withdraw at least a minimum percentage of the January 1 balance, and that withdrawal is fully taxable as ordinary income. There is no maximum — you can always take more.

The minimum starts at about 5.28% at age 71 and climbs each year: roughly 5.40% at 72, 6.82% at 80, 8.08% at 85, and 20% from age 95 onward. If your spouse is younger, you can elect to base the minimum on their age, which lowers the forced withdrawal and keeps more money sheltered.

The years between retiring and age 71 are usually your lowest-income years: employment income has stopped, and CPP, OAS and the RRIF minimum have not started. Those low-tax years are the cheapest time you will ever have to pull money out of an RRSP.

This is the 'RRIF meltdown': deliberately withdrawing enough each year to fill up the low tax brackets, rather than leaving a large balance that gets force-fed into your income after 71 on top of CPP, OAS and a pension. A large untouched RRSP frequently pushes retirees into a higher bracket in their late seventies than they were in while working.

Converting a portion of the RRSP to a RRIF at age 65 also unlocks the pension income amount and pension income splitting — RRIF withdrawals qualify at 65, RRSP withdrawals do not. Converting even a small slice, then withdrawing $2,000 a year, captures the federal pension credit at essentially no cost.

The counter-argument is simple and worth respecting: money left inside the plan keeps compounding tax-deferred. Withdraw early only up to the point where the tax rate you pay now is lower than the rate you expect later, and reinvest anything you do not spend in a TFSA so it keeps growing tax-free.

Old Age Security is reduced by 15 cents for every dollar of net income above roughly $93,000, and disappears entirely near $151,000. RRIF withdrawals count toward that income; TFSA withdrawals do not.

The Guaranteed Income Supplement, for lower-income retirees, is even more sensitive — it is clawed back at 50 cents on the dollar. For someone who will qualify for GIS, draining the RRSP before age 65 is often worth far more than the deferral it gives up.

Age amount credits also begin to phase out around $45,000 of net income. Between the age amount, OAS recovery and ordinary brackets, the effective marginal rate in retirement can be much higher than the posted bracket rate. Model the effective rate, not the headline rate.

Start from the guaranteed, indexed income. A defined benefit pension and CPP are lifetime, inflation-adjusted income you cannot outlive — treat them as the floor under your spending, not as an asset to maximize in isolation.

Delaying CPP past 65 increases it by 0.7% a month, up to 42% more at 70. Deferring OAS adds 0.6% a month, up to 36% at 70. Both are indexed for life. If you have RRSP money to spend in the meantime and reasonable health, spending the RRSP first and delaying CPP/OAS converts a taxable, clawback-exposed asset into guaranteed indexed income — usually the single highest-value move in a retirement plan.

A practical order for most retirees: spend non-registered cash and RRSP/RRIF withdrawals in the early years, delay CPP and OAS toward 70, keep the TFSA for last and for lumpy expenses, and top up the TFSA every year with any withdrawal you did not spend.

If you have a corporate defined benefit pension already paying, your low-bracket room is smaller, so the meltdown should be gentler and spread over more years. Pension income splitting with a spouse from age 65 (up to 50% of eligible pension and RRIF income) can move a whole bracket's worth of income to the lower-income partner.

Spousal RRSPs and spousal RRIFs are the other equalizer: contributing to the lower-income spouse's plan during working years produces two smaller retirement incomes rather than one large one, which is almost always cheaper in tax.

Withholding tax applies to anything you take above the RRIF minimum: 10% up to $5,000, 20% up to $15,000, 30% above that (different rates in Quebec). The minimum itself has no withholding, so many people set up quarterly instalments instead of a surprise April bill.

You can hold the same investments in a RRIF as in an RRSP — you do not need to sell anything to convert, and you can make the withdrawal 'in kind' by transferring securities to a TFSA or non-registered account rather than selling.

Name a beneficiary. A spouse can roll a RRIF over tax-free; without that designation the full balance is taxed on the final return, which can consume nearly half of it.

Keep contributing to your RRSP until the end of the year you turn 71 if you still have earned income and room, and consider a final over-contribution strategy only with professional advice.

The order of withdrawals in retirement is worth real money — tens of thousands of dollars over a thirty-year retirement — and it depends on your pension, your spouse's income, your health and your province. A fee-for-service planner or CPA who does not sell products is the right person to review the sequence before you lock in a CPP start date.