When Should Canadian Investors Start Withdrawing from Their RRSPs?

Retirement is a major part of your life, with a well-developed financial strategy making it the great extender of life after work instead of a time of great angst. For Canadian savers with a Registered Retirement Savings Plan (RRSP), at some point you will have to consider how to extract the funds and convert it to a Registered Retirement Income Fund (RRIF). You’ll also want to time withdrawals to minimize taxes. Let’s consider some important questions when it comes to the best way to retire in Canada.

Understanding RRSPs and RRIFs

Before looking in detail at these purposes and structures, let’s look at the basic elements of an RRSP and RRIF.

?RRSP (Registered Retirement Savings Plan):

Purpose: An RRSP is a tax-advantaged savings account that helps Canadians save for their retirement.

? Tax-deductible: contributions are tax-deductible and growth within is not taxed until you withdraw your money.

? Withdrawal Rules: You pay ordinary taxes on the amount of your withdrawal at your marginal tax rate.

?RRIF (Registered Retirement Income Fund):

Purpose: A RRIF is like a continuation of an RRSP as a vehicle to transform savings to retirement income.

? Conversion: By the end of the year, you turn age 71, you must convert your RRSP to a RRIF or an annuity, or take the money in a lump sum.

? Withdrawal rules: RRIFs trigger minimum annual distributions, which rise with age, but there’s no maximum.

?Strategies for Converting RRSPs to RRIFs

1. Incremental Conversion: Rather than waiting to convert your RRSP to an RRIF at age 71, you could start converting in an incremental fashion in any year that works for you in order to smooth out your income and tax liability over several years.

2. Waiting to Convert: Retirees who don't need their RRSPs right away might want to wait until the mandatory conversion date at age 71. In addition to tax-deferred growth that RRSP's enjoy, you can wait until you turn 71 to convert your savings to a retirement income stream using a RRIF. This might be useful if you think your taxes will be lower in the future.

3. Spousal RRIF: Where your spouse is younger than you, think about whether you would be better off using a spousal RRIF based on your spouse’s age, and having the minimum withdrawal based on that, which may be lower than it would be if you kept the RRIF in your own name.

?Timing Withdrawals to Minimize Taxes

1. Income Splitting: If you are age 65 or over, you can split up to 50% of pension income (and eligible RRIF withdrawals) from your return with your spouse or common-law partner and report it on their return. This is beneficial if your spouse has a lower tax rate.

2. Early Strategic Withdrawals: If you expect a lower tax bracket in early retirement, you can strategically withdraw more of your RRSP balance prior to age 71 than you would want after 71 in order to reduce the tax impact.

3. Using the Pension Income Credit: from age 65, you can claim federal tax credits for the first $2,000 of ‘eligible’ pension income – including RRIF withdrawals. Make sure you’re taking full advantage.

4. Take Other Income Streams into Account: Coordinate your RRIF withdrawals so as to complement other income streams, such as your receipt of the Canada Pension Plan (CPP) and other personal investments. This will give you a broad view of all income streams and allow you to optimize your tax planning.

?Main Points

?1. Cautious Portfolio Shifts: The earlier you start planning your withdrawal strategy and gradually shift your portfolio toward more tax-efficient holdings ahead of the “mandatory” conversion age of 71, the greater your menu of tax management options will be.

2. Get expert advice: Tax rules and personal fiscal situations can be complicated. Your retirement goals might benefit from expert advice from a financial advisor or tax professional.

3. Monitor: These Pensions Tax laws and regulation can change. Watch for any changes that might affect your withdrawal strategy.

Conclusion

Converting your RRSP to an RRIF is a key turning point in your retirement journey. With smart strategies, and timing your withdrawals smartly, you can make the most of your retirement dollars tax-efficiently, and fund the lifestyle and financial goals you want for your retirement years.

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