What to consider before converting your RRSP to a RRIF

By David Mortimer

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Congratulations, you’ve retired! After many years of working and saving, the time has finally come for you to travel, spend more time with family, or do any number of activities you may not have had time for when working 40+ hours per week.

One of the first decisions you now need to consider is when to convert your RRSP to a RRIF? Technically, you are required to do so by December 31^stof your 71^styear, but many retirees find themselves wondering if they should do so early. Here are some things to consider before making the conversion from RRSP to RRIF.

Am I retired for good?

It’s important for people to consider whether they’ve retired for good before converting their RRSP to a RRIF. Remember it may not be so easy to turn back  after making the conversion from RRSP to a RRIF so if you are planning to return to work, even part time, you may find yourself with a tax problem if you’re working and taking an income through your RRIF. The taxes you end up paying could easily wipe out any financial gains you would make from working part time, not to mention it would not allow you the option to continue contributing to your RRSP (once converted to a RRIF), which will further reduce your taxes – providing of course you are under the age of 72!

Thinking you might like to keep busy with a part time job? Consider supplementing your finances with your tax-free savings account and non-registered investments before touching your RRSP. If you draw these out first while still working, there will be fewer tax consequences. You may also be better off taking money from your RRSP on a short-term basis rather than officially converting to a RRIF right away.

When it comes down to it, don’t collapse your RRSP into a RRIF until you’re fully retired, and have considered all your potential income streams and their potential tax consequences.

What income streams are available to you?

When making the decision on when to convert your RRSP to a RRIF, it’s important to look at how you will be funding your retirement. Do you have a workplace pension you will be receiving? What about Old Age Security (OAS) or Canada Pension Plan (CPP)? Keep in mind that your OAS has certain claw-back provisions once your income exceeds a certain threshold.

OAS is another reason you may wish to consider depleting your TFSA or non-registered income streams first. As TFSAs are not recognized as income by the Canadian government, you may be best to delay taking income through a RRIF as long as possible, in order to delay any OAS clawbacks, while also maximizing the tax sheltered returns within your RRSP.

What will your lifestyle look like?

Everyone’s vision of retirement is different. If you’re planning to stay close to home and focus your time on family and volunteering, you may not require as much income as someone who is planning to travel extensively. Be honest with yourself about your lifestyle, and budget for it accordingly.

You may find that you will need to work part time for a few years after retirement in order to maximize your RRSP and other savings prior to fully retiring. If this is the case, delaying your conversion from RRSP to a RRIF as long as you can is a prudent decision. This will offer you a few extra years to contribute to your RRSP and grow your nest egg.

There is no one right answer

It’s important to remember that there is no single right answer when it comes to converting your RRSP to a RRIF. Instead, it is important to first look at your personal circumstances, and answer off ‘what is the lifestyle I want with retirement?’ Then you should review your financial position, know your income sources and consider how best these be coordinated to reduce your tax exposure and fund your retirement.

David Mortimer is Chief Member Services & Strategy Officer, for Cambrian Credit Union. With over 25 years of experience in banking, wealth and insurance services, Mr. Mortimer joined the senior management team at Cambrian Credit Union in 1999, where he serves as the Chief Member Services & Strategy Officer; overseeing all corporate communication, marketing, retail & business banking, wealth services and partner alliances. Mr. Mortimer is also President of Cambrian’s virtual division, Achieva Financial. For more information, see the Achieva website.