Converting your RRSP to a RRIF

Your RRSP has to be wound up by December 31 of the year you turn 71. One option is to transfer it to a registered retirement income fund (RRIF): the transfer isn’t taxed, the money stays invested, and from the next year on you have to take out at least a minimum amount each year, which is taxed as income.

Your options by the end of the year you turn 71

That year is also the last year you can contribute to your own RRSP. By December 31, you choose what happens to the money:

• Transfer it to a RRIF. No tax at the time of the transfer. You pay tax on the payments as you receive them.
• Buy an annuity. Also no tax when you buy it. The annuity payments are taxed as you receive them.
• Withdraw it. Tax is withheld, and the whole amount is added to your income for that year.

Taking it all out at once adds the whole amount to one year’s income, which can push much of it into higher tax brackets. Don’t leave the choice to chance: if the money isn’t moved to a RRIF or used to buy an annuity, the plan’s value is included in your income.

You don’t have to wait until 71. You can set up a RRIF earlier if you want regular income sooner; the CRA’s minimum-amount rules cover younger ages too.

How a RRIF works

You open a RRIF with a carrier such as a bank, trust company or insurance company, and transfer your RRSP into it directly. You can have more than one RRIF, including a self-directed one where you choose the investments.

Earnings inside a RRIF aren’t taxed; payments out of it are taxed in the year you receive them. You can’t make new contributions to a RRIF the way you could to an RRSP. Money generally goes in only by direct transfer, for example from an RRSP, a pension plan, another RRIF or an FHSA.

The yearly minimum

There’s no minimum in the year you open the RRIF. Starting the next year, your carrier must pay you at least a minimum amount every year. You can take more, but not less.

The minimum is the value of the RRIF at the start of the year multiplied by a prescribed factor that depends on your age at the start of the year (and, for some older RRIFs, on when the RRIF was set up). The factor goes up as you get older, so the minimum becomes a bigger share of what’s left. The CRA publishes the factors in its chart of prescribed factors; your carrier does the calculation for you.

Younger spouse? You can choose to base the minimum on your spouse’s or common-law partner’s age instead of yours. A younger age means a lower factor, and a lower required withdrawal. You have to make this choice on the original RRIF application, and you can’t change it later.

Tax withheld, and tax owed

No tax is withheld from the minimum amount. Tax is withheld from anything you take above the minimum. Either way, every RRIF payment is income on your return, so if you only take the minimum you may owe tax when you file.

RRIF payments can also raise your net income enough to affect income-tested amounts, such as the age amount and the Old Age Security recovery tax; see When to start CPP and OAS.

Credits for RRIF income at 65 and over

If you’re 65 or older at the end of the year (or you receive the payments because your spouse or common-law partner died), RRIF payments count as eligible pension income. That has two benefits:

• Pension income amount. You can claim a federal credit on up to $2,000 of eligible pension income.
• Pension income splitting. You and your spouse or common-law partner can jointly elect to have up to 50% of your eligible pension income taxed in their hands instead of yours. See Pension income splitting.

Under 65, RRIF payments are still taxable but don’t qualify for either, unless they’re paid because of your spouse’s death.

Spousal RRIFs

If your RRIF came from a spousal RRSP, watch withdrawals above the minimum. If your spouse or common-law partner contributed to your spousal RRSPs in the year of the withdrawal or the two years before, some or all of the amount above the minimum may be taxed in their hands. The minimum itself is taxed to you.

You also can’t contribute to your own RRSP after the year you turn 71, but if you still have RRSP room and your spouse or common-law partner is younger, you can contribute to a spousal RRSP for them until the end of the year they turn 71.

In short

• By December 31 of the year you turn 71, move your RRSP to a RRIF, buy an annuity, or withdraw it.
• A RRIF transfer isn’t taxed; payments are taxed when you receive them.
• From the year after you open it, you must take at least the yearly minimum, based on your age (or a younger spouse’s age, if you choose that at the start).
• No tax is withheld from the minimum, so plan for tax at filing time.
• From the year you turn 65, RRIF income qualifies for the pension income amount and pension income splitting.