The RRIF Conversion: What Happens at Age 71
Your Registered Retirement Savings Plan has been a key tool throughout your working years. But there comes a time when the government says the saving phase is over and the spending phase must begin. That time is age 71.
By the end of the year you turn 71, you must convert your RRSP into a Registered Retirement Income Fund, or RRIF. This is not optional. It is a legal requirement, and understanding what it means for your finances is essential for late-stage retirement planning.
What Is a RRIF?
A Registered Retirement Income Fund is the payout version of your RRSP. Instead of putting money in and letting it grow, you must take money out each year. The investments can remain the same. You can still hold stocks, bonds, mutual funds, ETFs, and GICs inside a RRIF. What changes is the requirement to withdraw a minimum amount every year.
The conversion itself is not a taxable event. You do not pay tax when moving money from your RRSP to your RRIF. Tax applies when you withdraw from the RRIF, because withdrawals are fully taxable as regular income.
The Mandatory Conversion at Age 71
The rule is straightforward: by December 31 of the year you turn 71, you must close your RRSP. You have three options for what to do with the money:
- Convert to a RRIF. This is by far the most common choice. Your investments stay intact, and you begin taking mandatory withdrawals based on your age.
- Purchase an annuity. You can use the funds to buy an annuity from an insurance company, which pays you a guaranteed income for life or a set period.
- Cash out the entire amount. This is almost always a terrible idea. Cashing out means the full balance is added to your income for that year, resulting in a massive tax bill that could easily consume 40 to 50 percent of the balance.
For most people, converting to a RRIF is the clear choice. It preserves your investments, spreads the tax bill over many years, and gives you ongoing control over how the money is invested.
Minimum Withdrawal Percentages
Once your RRIF is set up, the government requires you to withdraw a minimum percentage of the balance each year. The percentage is based on your age at the start of the year and increases as you get older.
Here are the minimum withdrawal factors for key ages:
- Age 71: 5.28 percent
- Age 72: 5.40 percent
- Age 75: 5.82 percent
- Age 80: 6.82 percent
- Age 85: 7.99 percent
- Age 90: 10.33 percent
- Age 95 and older: 20.00 percent
If your RRIF balance is $500,000 and you are 72, your minimum withdrawal for the year is $27,000. That amount is fully taxable as income. If your marginal tax rate is 30 percent, you will owe about $8,100 in tax on that withdrawal.
You can always withdraw more than the minimum. There is no maximum withdrawal limit. But every dollar you take out is taxed, so there is a balance between taking what you need and managing your tax bill.
You also have the option to base the withdrawal percentage on your younger spouse's age instead of your own. If your spouse is younger, using their age means a lower minimum withdrawal percentage, which lets you keep more money in the RRIF growing tax-deferred for longer.
Tax Implications of RRIF Withdrawals
RRIF withdrawals are taxed exactly like RRSP withdrawals. Every dollar is added to your taxable income and taxed at your marginal rate. Large mandatory withdrawals can push you into a higher tax bracket and potentially trigger the OAS clawback.
Planning ahead is essential. If you wait until 71 to think about your RRSP, the mandatory withdrawals may create a tax problem. Consider someone with an $800,000 RRSP. At age 72, the minimum withdrawal is $43,200. Combined with CPP and OAS, their total income could climb quickly, especially with a workplace pension or other investments.
What Happens If You Do Not Convert
If you miss the deadline, the financial institution that holds your account will typically convert it to a RRIF automatically. However, some providers may deregister the account, meaning the entire balance is cashed out and added to your income for the year.
The tax bill from a full deregistration can be devastating. On a $500,000 RRSP, cashing out in a single year could result in $200,000 or more in taxes. Put a reminder in your calendar well before your 71st birthday and start planning early.
Early Planning Strategies
The best time to think about your RRIF conversion is years before it happens. Here are strategies to consider:
Start drawing from your RRSP before 71. If you retire before 65 and have lower income in those years, consider making RRSP withdrawals while you are in a lower tax bracket. This reduces the balance that will be subject to mandatory withdrawals later. Every dollar you withdraw early is a dollar that does not create a mandatory withdrawal at 71.
Coordinate with other income sources. Plan your CPP start date, OAS start date, and RRSP withdrawals together to create a smooth, tax-efficient income stream. Our retirement calculator can help you model different combinations to find the one that minimizes your total tax burden.
Use the spousal RRIF age advantage. If your spouse is younger, you can elect to use their age for calculating minimum withdrawals. This reduces the mandatory amount and gives you more flexibility.
Consider converting early. You can convert your RRSP to a RRIF at any age. Some people convert at 65 to start drawing a steady income and take advantage of the pension income tax credit, which applies to RRIF income starting at age 65.
Getting Your Plan in Place
The RRIF conversion is one of those retirement events that rewards advance planning. The earlier you start thinking about how and when to draw down your RRSP, the more options you have to optimize your tax situation and preserve your OAS benefits.
To see how different conversion strategies affect your retirement income year by year, use our retirement calculator with your actual account balances and income sources. You can also model early withdrawal scenarios to see whether drawing down your RRSP before 71 makes sense for your situation.
Key Takeaways
- You must convert your RRSP to a RRIF by December 31 of the year you turn 71
- RRIF minimum withdrawals start at about 5.28 percent at age 71 and increase with age
- All RRIF withdrawals are fully taxable as regular income
- Failing to convert can result in the entire balance being cashed out with a massive tax bill
- Early planning strategies include pre-71 withdrawals, spousal age elections, and coordinating with CPP and OAS timing
The RRIF conversion is not something to fear, but it is something to prepare for. Start planning early so you can control the timing and amount of your withdrawals rather than letting the government's schedule dictate your tax bill.