Can you delay a RRIF withdrawal?

Can you convert an RRSP to a RRIF based on a spouse’s age?

One must convert a RRSP to a RRIF in the year the owner, not the contributor (in the case of a spousal RRSP), turns age 71. The conversion can happen anytime throughout the year, and it doesn’t have to happen before the owner’s birthday of that year. Also, even though you must do the conversion the year you turn age 71, it is not until the next year, when you turn 72, that you must draw money from the RRIF.

Ted, this means you can delay your RRIF withdrawal to age 72, and your wife doesn’t have to convert her spousal RRSP to a spousal RRIF until the year she turns 71.

What happens if you miss the RRIF deadline?

If you don’t get around to converting your RRSP to a RRIF by the deadline, the financial institution administering the RRSP will automatically do it for you. But don’t let this happen. It is possible the beneficiaries or successor owners named on the RRSP will not carry over to the RRIF if you ignore the conversion. Doing it yourself allows you to avoid this error.

How to determine RRIF withdrawal amounts

Once you have a RRIF, you are required to withdraw a minimum amount every year. That amount is based on two things: the value of your RRIF at the start of the year and your age.

Ted, at age 72, you are required to withdraw a minimum of 5.4% of the starting year value of your RRIF, and if you base it on your wife’s age of 65, the minimum is 4%. The advantage of using the age of the younger spouse is that you can draw a little less money, which lowers your annual tax, and if you need more money, you always have the option to draw more. 

As you get older, the percentage you must withdraw gets larger until age 95, when it tops out at 20%. Because the minimum withdrawal amount is based on two variables that change each year, your age and the RRIF value, the minimum amount you receive each year will change. 

How often can you withdraw from a RRIF?

Converting your RRSP to a RRIF also means deciding on the frequency of your withdrawals, which can be monthly, quarterly, annually—almost as often as you want. Nothing is fixed, and you can make changes at any time. Set your RRIF payments to the minimum if you are not sure on your needs, because again, you can always request more money if needed. Just remember there’s withholding tax. 

Taxes on RRIF withdrawals

There is withholding tax on a RRIF, just like with an RRSP withdrawal, but with a difference. In the second calendar year of a RRIF, there is no withholding tax on the minimum withdrawal, only the amount over the minimum. (If you open a RRIF in December, January would be the second year having the RRIF.)

Knowing there is no tax on a minimum RRIF withdrawal in the second calendar year, and no minimum withdrawal required in the first year the RRIF is set up, it makes sense to plan ahead. Ted, this may not apply in your situation, but imagine if you were 64 and planned to start your regular RRIF withdrawals at age 65. It would make sense to convert the RRSP to a RRIF in the year you turn 64, even December. Then in January of the following year you can start your RRIF payments and avoid withholding taxes on the minimum payment. If you waited until age 65 to convert and start your RRIF payments there would be withholding tax on the RRIF minimum. 

Income splitting with a RRIF

The ability to avoid withholding tax is one reason it’s a good idea to convert an RRSP to a RRIF, once you know you’re going to draw from the account on a regular basis. Plus, RRIF income qualifies for pension splitting after age 65, which is another good reason for early conversion with a spousal RRSP.

As you probably know, you must wait two full calendar years after contributing to a spousal RRSP before a spouse can make a withdrawal at their tax rate. With a spousal RRIF, there is no two-year calendar waiting period, if only the minimum RRIF withdrawal is made. This is a good reason for income splitting and for having a spousal RRSP. 

Ted, if you’re trying to reduce your taxable income for when you start your OAS, it may make sense for your wife to convert her spousal RRSP to a spousal RRIF now.   

Oh, if you convert an RRSP to a RRIF before age 71 and then decide you don’t need the income anymore, you can always convert your RRIF back to a RRSP before the year you turn age 72. The only thing to be aware of is the minimum RRIF payment must be paid out before converting to a RRSP.

How to reduce taxable income with an RRSP

Here are a couple of other quick ideas that may reduce your taxable income. 

If you have RRSP contribution room, continue to make spousal RRSP contributions until your wife’s final contribution year (the end of the year she turns 71). 

If you’re still earning RRSP contribution room at age 71, consider making a $2,000 RRSP overcontribution that year. RRSP overcontribution penalties apply to amounts over $2,000. You won’t be able to deduct the $2,000 in the year of the contribution but you will be able to deduct the $2,000 in the year you turn age 72.

Also, remember you don’t have to claim an RRSP tax deduction in the year you make the contribution. In some cases it may make sense to delay RRSP tax deductions and use them when you are drawing from your RRIF to reduce your income and OAS clawback.

Being proactive with RRIFs

Ted, thanks for your questions. There are lots of little ins and outs with RRSPs and RRIFs, so it is good that you are taking a proactive approach thinking about how to use them to your advantage rather than blindly contributing and converting at age 71.

Read more about RRIFs:

• Can you transfer a RRIF to a TFSA—and what are the tax implications?
• Downloadable RRIF withdrawal rates chart
• Should you max out your RRSP before converting it to a RRIF?
• RRSP to RRIF, and LIRA to LIF: How it all gets done

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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