Should you max out your RRSP before converting it to a RRIF?

I am guessing you have downsized your home to move to a condo and now have money to contribute more to your registered retirement savings plans (RRSPs) as a result. First, we will start with a quick rundown of how RRSP to RRIF conversion works.

Converting an RRSP to a RRIF

A registered retirement income fund (RRIF) is the most common withdrawal option for RRSP savings. By December 31 of the year you turn 71, you need to convert your RRSP to a RRIF or buy an annuity from an insurance company. So, the conversion must take place not by his June birthday, Chris, but by December 31, 2025. You have a little more time than you might think.

A RRIF is like an RRSP in that you can hold cash, guaranteed investment certificates (GICs), stocks, bonds, mutual funds, and exchange traded funds (ETFs). In fact, when you convert your RRSP to a RRIF, the investments can stay the same. The primary difference is you withdraw from it rather than contributing to it. 

Withdrawing from a RRIF

RRIFs have minimum withdrawals starting at 5.28% the following year if you convert your account the year you turn 71. This means you have to take at least 5.28% of the December 31 account value from the previous year as a withdrawal. Those withdrawals can be monthly, quarterly or annually, as long as the minimum is withdrawn in full by year’s end. Each year, that minimum percentage rises. 

There is no maximum withdrawal for a RRIF. Withdrawals are taxable, though. If you are 65 or older, you can split up to 50% of your withdrawal with your spouse by moving anywhere between 0% and 50% to their tax return when you file. You do this to minimize your combined income tax by trying to equalize your incomes.

You can base your withdrawals on your spouse’s age and if they are younger, the minimum withdrawals are lower. 

Contributions before you convert

If you have funds available from your condo downsize, Chris, you could contribute to your husband’s RRSP. He can contribute until December 31, 2025. If you are younger than him, he can even contribute to a spousal RRSP in your name until December 31 of the year you turn 71, whereby he gets to claim the deductions, but the account belongs to you with future withdrawals made by you.

However, just because you have money to contribute, it doesn’t mean you should. Say your husband has $10,000 of RRSP room and his taxable income from Canada Pension Plan (CPP), Old Age Security (OAS), investments, and other sources is $50,000. He could contribute and deduct that $10,000 to reduce his taxable income to $40,000. In most provinces, the tax savings would be about 20%. His tax refund would be about $2,000.