If you’ve ever explored the nuances of Registered Retirement Savings Plans (RRSPs), you may already be aware you can’t own them forever. It is mandatory that all RRSPs be converted into Registered Retirement Income Funds (RRIFs) by December 31st of the year you turn 71. This begs the question: “should everyone wait until they’re 71 to start a RRIF? Or is there a better time?”
Let’s start by understanding RRIFs a little better and how they differ from RRSPs. RRIFs really only have two key rules that make them unique. The first rule is that you’re no longer able to make new contributions (unless you’re rolling in another, pre-existing RRIF or RRSP account). The second is that you must take at least a minimum withdrawal from the RRIF each year. The dollar amount is determined by a formula, using your age and the account’s value at the start of the year. The older you are, and the more money in your RRIF, the higher your minimum withdrawal will be!
I like to think of RRIFs as turning on leaky faucet. Once you’ve committed to a RRIF, some money will come out every year whether you want it or not. You can turn the flow down to a “drip,” but you can never turn the tap all the way off! Controlling when you turn that tap on for the first time is crucial to proper tax and retirement planning.
Who should defer starting their RRIF before age 71? Namely people who have high or fluctuating incomes from other sources. If you’re still working in your 50s and 60s, adding on a layer of taxable RRIF income may do your plans more harm than good. Remember, RRIF income is going to unavoidably keep flowing year after year. Triggering the inflows in high tax years is a missed opportunity for tax deferral and (potential) tax reduction!
Who should consider starting their RRIFs early? Primarily they fall into one of three camps:
- People who don’t have other sources of pension income. Unlike an RRSP withdrawal, a RRIF payment qualifies as “pension income” on your tax return. This could enable you to qualify for the pension tax credit if you’re over the age of 55, or for pension income splitting if you’re over the age of 65. Getting an extra 6-16 years of tax breaks may be a big boost to your retirement plans!
- People who are deferring CPP and OAS. Holding off on your government pensions has a substantial, guaranteed rate of return. From age 60 to 65, your CPP benefits are enhanced by 7.2% per year for deferring. From age 65 to 70, it’s 8.4% per year. OAS benefits follow a similar enhancement of 7.2% per year by deferring from 65 to 70. A reasonable retirement strategy to explore is to draw down your RRIF early and delay the guaranteed government benefits for later!
- People who need the money to fund their retirement! Deferring your RRIF income for later has some significant pros. However, the last thing I believe any retiree should do though is sacrifice the enjoyment of their retirement to achieve optimal financial planning. If a successful, meaningful retirement is contingent on you accessing your RRSPs before the age of 71, do it!
If you have the choice about when to start your RRIF payments, consult with your Financial Planner and Accountant. Waiting until you’re forced to make the switch can be advantageous for some and a lost opportunity for others. Like most major financial decisions, the timing of when to start your RRIF income stream is unique to your circumstances!
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