Most people know you can contribute annually to your Registered Retirement Savings Plan (RRSP). Everyone who invests in an RRSP must also understand that by December of the year you turn 71, you must transfer your RRSP holdings into the Registered Retirement Income Fund (RRIF).

How does the RRIF work? Simply put, the RRIF is a registered fund that provides retirement income. A minimum amount must be withdrawn from the RRIF each year, and the income received is taxable. 

The upside of the RRIF is that it allows you to keep a continuum of the tax benefits of RRSPs — using the RRIF, you hold the money you’ve saved up over the years in plans like RRSPs. You don’t pay tax on that money (as well as any investment profits that accrue) until you withdraw it. 

Why convert an RRSP to a RRIF? You are no longer allowed to contribute your RRSP in the year that you turn 71 after December 31. You must close your RRSP. Most people choose to transfer the money to the RRIF. Transferring the funds to the RRIF by the deadline is essential, or all of it will be considered taxable income in the same year.

It is taxed because when you put the money into your RRSP, you get a deduction from your income tax to lower your total taxable income. The upside is that you save on taxes during your working life, whereas, during retirement, all your RRSP transferred to your RRIF becomes taxable as income only when withdrawn at a minimum under a government schedule. Additionally, if you withdraw more in any given year, there is no maximum that you can take into income. Your capital and income remain tax-sheltered until you withdraw them. RRIF rules establish a minimum amount you must withdraw, increasing per annum as you age, but there’s no maximum. Talk to your advisor about your minimum RRIF income (the table is available on the Canada Revenue Agency Website).

Funds that transfer to the RRIF: Only one deposit occurs to move funds into the RRIF when you open it. Funds come from your accounts of:

• RRSPs
• Pooled Registered Pension Plan (PRPP)
• Specified Pension Plan (SPP)
• Once transferred, you can only take money out of your RRIF.

Your financial institution can guide you. You can’t close your RRSP, open your RRIF set-up, and accomplish the transfer yourself. When nearing age 71, your financial institution generally contacts you to warn you it’s time to begin the transfer. They will offer you advice and do the necessary transactions. You must sign forms via your financial institution with a digital signature.

Note: You can close your RRSP and transfer funds to the RRIF earlier than age 71. Why would you convert your RRSP to a RRIF ahead of turning 71? Depending upon the situation, if you decide to take early retirement, you may want to withdraw some of your savings to maintain your lifestyle. You can achieve this by using the RRIF option. RRIF payments are intended to be a gradual, long-term withdrawal strategy to establish your payments to be paid monthly, quarterly, or once or twice a year. You can change the frequency and the amount at any time.

You can use your spouse’s age to your advantage. If your eligible spouse is younger than you, you can give their age when you open the RRIF instead of your age. Once you have selected your preference to use the spousal strategy, it is an irrevocable decision, even in the event of death or divorce. There is no withholding tax if you withdraw the minimum amount, though it is declarable on your tax return. Talk to your advisor if you have questions about tax withholding. Note: Similarly, you must transfer a Locked-in Retirement Account (LIRA) to a Life Income Fund (LIF) in the same timeframe as the RRSP needs to be transferred to the RRIF.

You can still contribute to a younger spouse’s RRSP. Spousal RRSP contributions can still be made if you, at age 71, are still earning an income. Talk to your advisor about the benefits of using a spousal RRSP if your spouse is younger than 71.