My goal is to retire early, ideally a few years before I turn 60. I am aware that I must convert my registered retirement savings plan into a registered retirement income fund or annuity by the end of the year in which I turn 71. But what are my options if I want to start making RRIF withdrawals sooner than that? Is that a good idea?
You are free to convert your RRSP into a RRIF at any age. You will then be required to make minimum withdrawals starting in the year after you open your RRIF account. These withdrawals start small and generally get larger as you get older.
For someone aged 70 or younger, the minimum annual withdrawal is calculated according to the following formula: the RRIF’s market value, as of Jan. 1, divided by the difference between 90 and the person’s age, also as of Jan. 1.
For example, say you convert your RRSP into a RRIF in 2025 and that, as of Jan. 1, 2026, you are 59 and your RRIF is worth $500,000. You would be required to make a minimum withdrawal in 2026 of about $16,129, calculated as $500,000 divided by 31 (90 minus 59). That works out to about 3.2 per cent of your RRIF’s value that you would be required to withdraw.
Because the denominator in the formula gets smaller as you get older, the percentage of your RRIF that you are required to withdraw gets larger. Using the same formula for someone who is 70 years old, the minimum withdrawal would rise to 5 per cent.
For RRIF holders aged 71 to 94, minimum withdrawal rates rise gradually from 5.3 per cent to 18.8 per cent. These rates are not determined by the above formula, having been lowered in the 2015 federal budget to allow seniors to preserve more of their RRIF savings. At age 95 and above, the annual RRIF withdrawal rate is fixed at 20 per cent.
(Tip: If you have a younger spouse, you can use that person’s age to determine your minimum RRIF withdrawal. Doing so will allow you to keep more money in your RRIF where it benefits from tax-deferred growth.)
Why set up a RRIF and make withdrawals earlier, and possibly larger, than you have to? There are a few scenarios where this could make sense. If you have an especially large RRSP but only modest income in retirement, drawing the funds down early could help to avoid a potentially large tax hit when you die and the RRIF’s assets are included as income on your final tax return. For a RRIF worth hundreds of thousands of dollars, a chunk of the plan’s value could be taxed at the highest marginal rate. In Ontario, for example, income above $246,752 is taxed at a combined federal and provincial rate of 53.53 per cent.
The tax hit can be delayed if the RRIF is left to a surviving spouse or common-law partner, who can roll the proceeds into his or her own registered account. But when the surviving spouse or partner dies, the combined RRIF then becomes taxable. (There are circumstances, such as when the RRIF is left to a financially dependent child or grandchild, when the tax on the holder’s death can be avoided.)
If you plan to stop working before you turn 60, and don’t plan to collect Canada Pension Plan benefits until you turn, say, 65, the intervening years could be a good time to make RRIF withdrawals as your income will drop and withdrawals will be taxed at a lower rate. Keep in mind, too, that RRIF withdrawals are not subject to withholding tax as long as they do not exceed the required minimum. Withdrawals from an RRSP, on the other hand, are subject to withholding tax, as are any amounts above the minimum required withdrawal from a RRIF.
Depending on your other sources of income in retirement, starting RRIF withdrawals early may also help to reduce or eliminate clawbacks of Old Age Security payments, which you can elect to start receiving as early as the month after you turn 65. Generally, however, drawing down one’s RRIF early is most advantageous for people at or near the lowest marginal tax bracket, for whom OAS clawbacks are not an issue.
In all cases, the benefits of depleting your RRIF early must be balanced against the loss of tax-deferred growth inside the RRIF.
Determining the best time to convert your RRSP into a RRIF requires careful consideration of variables including your expected income in retirement, financial needs and desired lifestyle. Many people find that delaying conversion to a RRIF as long as possible and making only minimum withdrawals suits their goals. But everyone’s situation is different and, for some, drawing down the RRIF early may make financial sense.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl