My RRSP Must Become a RRIF — How Do I Avoid the Tax Hit?
By the end of the year you turn 71, your RRSP must be converted to a RRIF (or annuity) — and mandatory minimum withdrawals begin the following year. For many affluent Ontarians, this is the first time they're forced to withdraw and pay tax on money they don't actually need to spend. Without a plan, those withdrawals can push you into the top tax bracket and create a tax bill far larger than necessary.
Watch: My RRSP must become a RRIF. How do I avoid the tax hit?
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Taivi Tayler walks through RRIF conversion at 71 and how to manage the tax that comes with it.
Taivi Tayler walks through RRIF conversion at 71 and how to manage the tax that comes with it.
What actually happens at 71
Your RRSP closes and a RRIF opens in its place. The government sets a minimum withdrawal percentage that rises with your age. The larger your registered balance, the larger the forced annual withdrawal — and every dollar is taxed as ordinary income in the year you take it. The problem is that these mandatory withdrawals often arrive at the same time as CPP, OAS and pension income, stacking income into a single high-tax year.
The estate problem people miss
What's left in a RRIF at death doesn't simply pass to your family tax-free. For a surviving spouse it can roll over, but for other beneficiaries the remaining balance is often fully taxable in the year of death — sometimes at the highest marginal rate. Planning the drawdown strategy years in advance is what separates a smooth transfer from a large, avoidable tax bill.
Where plans go wrong, and what to do
Waiting until 71 to think about RRIF withdrawals
Start a pre-71 drawdown strategy to spread income across lower-tax years before minimums force it.
Mandatory withdrawals stacking on top of CPP and OAS
Sequence your income sources so RRIF minimums don't push you into the top bracket.
A large RRIF balance left to non-spouse beneficiaries
Plan the drawdown and beneficiary structure years ahead to reduce the year-of-death tax hit.
No consideration of pension income splitting
Use pension income splitting to shift qualifying income to a lower-income spouse.
This is exactly what the check-up covers.
In about 3 minutes you'll see where this issue sits in your own plan — then book a free review with Taivi to talk it through.
Or call Taivi directly: 1-866-550-6932