Convert an RRSP to a RRIF: Prepare Minimum Withdrawals
Note the conversion deadline and the minimum withdrawal factor that will apply from the following year.
In this article
The RRSP has a deadline: December 31 of the year you turn 71. Converting to a RRIF is the most common option, since an annuity and a full cash-out are rarely better. The RRIF changes the nature of the account without touching the investments. Contributions stop, and a minimum withdrawal becomes mandatory the following year. It is calculated each January 1 by applying to the balance the factor matching your age, a percentage that rises under the applicable table. Two tax points frame the withdrawals. The minimum escapes withholding at source without being tax-free, and voluntary withholding avoids the April bill. Any excess faces tiered withholding. Two settings improve the plan. Calculating on the younger spouse's age, ticked at opening, reduces the forced withdrawals. A liquid reserve inside the RRIF keeps a falling January from forcing you to sell. This article prepares the conversion step by step, from the calendar to the tax settings.
Note the conversion deadline
A registered retirement savings plan must be converted by the end of the calendar year of the 71st birthday. The options are a registered retirement income fund, an annuity or a full withdrawal. That date is not negotiable. If you miss it, the entire plan is taxed in that year, which is catastrophic on a large account. Prepare the conversion several months ahead, to give the institution time to process the forms. Converting earlier is possible and sometimes advantageous, notably to split pension income between spouses before the deadline age.
Understand how the minimum withdrawal is calculated
The annual minimum withdrawal is obtained by applying a factor, based on age, to the fund's value on January 1. That factor rises each year, so the required withdrawal grows as the portfolio shrinks. A little-known rule lets you use the younger spouse's age to set the factor. The minimum withdrawal then drops and the tax deferral extends. That choice is made when the fund opens and cannot be changed afterward. Examine it at that precise moment, with the age gap and the couple's tax situation in hand.
Distinguish the minimum from what is withheld
The minimum withdrawal is subject to no tax withholding at source. This surprises people the first spring: the income is fully taxable, but nothing was deducted during the year, and the bill arrives all at once. Withdrawals above the minimum do carry withholding, at a rate that rises with the amount. Two solutions exist: ask for voluntary withholding on the minimum withdrawals, or make instalment payments. Either avoids the unpleasant surprise. Choose in the first year rather than after living through the mismatch.
Plan liquidity to avoid forced sales
Withdrawals remain mandatory even when markets fall. You might have to sell investments at the worst moment, which durably erodes a drawdown portfolio. Prepare the defence in advance: keep in the fund the equivalent of one to two years of withdrawals in cash or short-term investments, and replenish it in favourable periods. Some funds also allow an in-kind withdrawal. The security is transferred to a non-registered account instead of being sold. The obligation is met without realizing the loss, but the tax remains due on the value transferred.
Quebec scenario
The year he turns 71 is approaching, and a retiree in Baie-Comeau learns that his RRSP cannot grow old with him. The law requires converting it by December 31 of that year. An annuity and a full cash-out are the other options, almost always less advantageous. He chooses to convert to a RRIF, which changes the nature of the account. The investments stay, contributions stop, and a minimum withdrawal becomes mandatory the following year. That minimum is calculated each January 1: you apply to the balance the factor that matches his age, a percentage that rises year over year under the applicable table. Two tax points need his attention before the first withdrawal. First, the minimum escapes withholding at source, but it is still taxable. The tax settles at filing, and he chooses to add voluntary withholding to avoid the April bill. Second, any excess beyond the minimum faces withholding at the prescribed tiers, which will matter the year a project demands more. Liquidity settles the rest. So that a January in a falling market never forces him to sell, he keeps two years of minimum withdrawals in liquid deposits inside the RRIF. The rest stays invested according to his profile. One last setting is often forgotten: the minimum can be calculated on the younger spouse's age. You tick that option at opening. It reduces the forced withdrawals and lets the tax deferral work longer.
Checklist
- Note the conversion deadline on the calendar
- Compare RRIF, annuity and cash-out
- Tick the calculation on the younger spouse's age
- Expect the first minimum withdrawal the next year
- Add voluntary withholding on the minimum
- Know the withholding tiers on the excess
- Keep two years of withdrawals liquid inside the RRIF
- Keep the rest invested per the profile
- Review the withdrawals every January first
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