RRSP Maturity Options: What You Need to Know

You don’t have to wait until you’re 71 to convert your RRSP. You can do it anytime before then, depending on what works best for your retirement income strategy. The key is choosing the right option based on your goals, cash flow needs, and tax situation.

If you are turning 71 this year, you must convert your RRSP into an income plan before the end of the year. There are three main ways to do this, and each has its own benefits and considerations. Let’s walk through them so you can make the best choice for your retirement.

Your Three RRSP Income Options

1. Cashing in Your RRSP

This option gives you full access to your money right away, but there’s a big downside: the entire amount is taxed as income in the year you withdraw it. Depending on the size of your RRSP, this could result in a hefty tax bill. Because of this, cashing out is rarely the best approach.

2. Buying an Annuity

An annuity provides a guaranteed income for a set period or for life, depending on the type you choose. This option removes the worry of investment decisions and market fluctuations. However, once you buy an annuity, you typically lose access to the capital.

The two most common annuities are:

• Single Life Annuity – Provides income for your lifetime.
• Joint Life Annuity – Provides income for both you and your spouse/common-law partner (CLP), continuing after one of you passes away.

 

The more features you add (such as guaranteed payouts to your estate or cost-of-living adjustments), the lower the income payments will be.

Pros of an Annuity:

✔Predictable income for life.
✔No investment decisions to worry about.
✔No risk of outliving your money.

Cons of an Annuity:

✘ No access to your capital.
✘ Limited flexibility if your needs change.
✘ The decision is permanent.

3. Converting to a Registered Retirement Income Fund (RRIF)

A RRIF is the most flexible option. It works like an RRSP in that your investments continue to grow tax-free, but instead of contributing, you must withdraw a minimum amount each year.

Key Features of a RRIF:

• You must begin withdrawals the year after setting it up. 
• The minimum withdrawal is based on your age and the value of your RRIF on December 31st of the previous year.
• If your spouse/CLP is younger, you can base withdrawals on their age to reduce the minimum required payments.
• You can withdraw more than the minimum if needed.
• Withdrawals are taxable as income.

RRIF Minimum Annual Withdrawals

The government sets the minimum amount you must withdraw each year. If you’re under 71, the calculation is:

1 ÷ (90 – your age on January 1st) = minimum withdrawal percentage

For those 71 and older, the government provides a set percentage based on age. Here’s a quick look at a few key ages:

• Age 71: 5.28%
• Age 75: 5.82%
• Age 80: 6.82%
• Age 85: 8.51%
• Age 90: 11.92%
• Age 95+: 20.00%

This means that as you age, your required withdrawal percentage increases.

Naming a Beneficiary for Your RRIF

If you pass away with funds still in your RRIF, the remaining balance is typically taxed as income in your final tax return. However, naming the right beneficiary can help minimize taxes:

Qualified Beneficiaries for Tax-Free Rollovers:

1. Spouse or Common-Law Partner – Can transfer the RRIF tax-free to their own RRSP or RRIF.
2. Financially Dependent Child/Grandchild (Under 18) – Can receive the funds through an annuity until age 18.
3. Financially Dependent Child/Grandchild (with Disabilities) – Can transfer funds into a Registered Disability Savings Plan (RDSP) or receive annuity payments.

 

If you have a spouse/CLP, you can choose between:

1. Naming them as a Beneficiary – The RRIF balance transfers to their RRSP or RRIF.
2. Naming them as a Successor Annuitant – The RRIF continues in their name with no changes.

If you don’t have a spouse/CLP, naming another beneficiary still avoids probate fees but won’t eliminate the tax bill.

Planning for Taxes on RRIF Withdrawals

RRIF income is 100% taxable. If you only take the minimum withdrawal, no taxes are withheld. However, for withdrawals above the minimum, withholding tax applies:

Amount Withdrawn Over the Minimum	Withholding Tax (Except Quebec)	Withholding Tax (Quebec)
Up to $5,000	10%	20%
$5,001 – $15,000	20%	25%
Over $15,000	30%	30%

Tax Tip: You can request additional tax withholding on RRIF withdrawals to help avoid a large tax bill at year-end.

What Should You Do Next?

Your decision on when and how to convert your RRSP should align with your retirement goals and cash flow needs. Here are some key questions to consider:

• Which option (RRIF, annuity, or cashing out) fits your income needs best?
• How much do you need to withdraw each year?
• Should you base your RRIF withdrawals on your spouse’s age to lower the minimum payments?
• Who should you name as a beneficiary?
• How can you manage taxes efficiently?

 

If you’d like help reviewing your options and making a plan that works for your retirement, let’s set up a time to chat.

If you enjoyed this,  you would love our white paper, Your Retirement Road Map: How to Make the Transition to Retirement 

Are You on Track with Your Retirement Strategy? FIND OUT TODAY!

For more information, refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring Wealth by Jack Lumsden, MBA, CFP® or schedule a call with Jack at 905-332-5503