You have saved up your whole life, and you finally reached the pinnacle. You have decided to retire. What happens to your RRSPs when you retire?
The short answer is nothing… but that would be too easy, so let us look at a few different scenarios.
You don’t need the money.
Let’s say that you are 63 years old. You have just retired, and you do not necessarily need the money you have in your RRSPs. You have other sources of income that are going to sustain your lifestyle.
In this case, you can leave your RRSP to grow but by the time you are 71 years old, you will have to convert your RRSPs into what’s called a RRIF or a registered retirement income fund. A RRIF is an account where you are forced to start taking money out every year. This happens when you turn 72. A quick summary, you are 63 years old today; by the year you turn 71, you must convert your RRSP into a RRIF, and then the following year, when you’re 72, you are forced to start making withdrawals.
There are no maximum withdrawal restrictions once your money is in a RRIF. You could withdraw the total amount if you wanted. However, there would most likely be a significant tax consequence if you were to do that. You are mandated to withdraw a certain minimum amount from your RRIF every year. At 72, it’s 5.4% of the total at 73; it’s 5.53%. Eventually, at age 90, it’s 11.92%. Every year that percentage number goes up.
To view the RRIF minimum percentages, click here
Show me the money
Now let’s say you are 63, and you do need money out of your RRSPs. Let’s say you need $30,000. In this case, at 63, you can pull $30,000 from your RRSPs. At 64, the same thing. Once you are 65, this is where it may make sense to convert a portion of your RRSPs into a RRIF. You might be wondering why I would suggest that, especially when you are forced to start taking money out every year.
Well, because you do not have to convert all your RRSPs. Suppose you are planning on taking out $30,000 a year anyways. You can move $30,000 from your RRSP into your RIFF. As mentioned above, once it is in a RIFF, there are no rules on the maximum amount you withdraw.
The benefit is if you have no other pension income, and I am not talking about CPP or OAS. I am talking about work pension. If you have no other pension income, then the money you withdraw from your RIFF starting at age 65 would qualify for the pension credit. If neither you nor your spouse have other pension income, this could save you $500 to $1,000 on your tax return.
To summarize, under the age of 65, you can pull money directly from your RRSP. At the age of 65, it may make sense to transfer a portion of your RRSP into a RIFF to take advantage of the pension credit. You will want to discuss this with your financial advisor or your accountant. If you don’t need the money, you can leave it in your RRSP until you turn 71. At that point, you must convert it to a RRIF and start making withdrawals by the time you turn 72.
The Tax Bomb
In the first scenario, if you don’t need the money, you can wait till 71 to convert to a RRIF. But it might make sense to start pulling money out of your RRSP sooner rather than later because of the tax bomb it can create. It is essential to know that if you do not pull money out, you may be looking at a 50% tax bill down the road. A scenario you want to avoid.
I encourage you to check out our RRSP tax bomb video. The video goes over a strategy that, in certain instances, it makes sense to pull money out even if you don’t need it.