Retirement is a major life milestone that raises the question of what happens to your financial assets. If you have been contributing to a Registered Retirement Savings Plan, you may wonder how to manage it once you retire. The decisions you make about withdrawals and taxes can significantly impact your financial future.
After retirement, your RRSP no longer functions as a contribution account. Instead, it becomes a source of income you will gradually withdraw to cover your expenses. These withdrawals are subject to taxes, and understanding how this works can help you make smarter decisions to minimize your tax liability while maximizing your retirement income.
Ways to Transition From an RRSP to an RRIF
By the end of the year you turn 71, the Canadian government requires you to convert your RRSP into a Registered Retirement Income Fund (RRIF) or another income-producing option. An RRIF allows you to withdraw funds gradually, which provides a steady income during retirement. Unlike an RRSP, you can no longer make contributions to the RRIF, and annual withdrawals are mandatory.
The minimum withdrawal amounts for an RRIF are determined by the government based on your age. As you grow older, the required withdrawal percentage increases. This ensures you use the funds during your lifetime, but it also means careful planning is needed to avoid depleting your funds too quickly.
Age | Minimum Withdrawal Rate (%) |
65 | 4.00 |
71 | 5.28 |
80 | 6.82 |
90 | 11.92 |
Taxes on RRSP Withdrawals
All withdrawals from an RRSP or RRIF are considered taxable in the year you make them. This means the amount you withdraw is added to your total income for that year and will be taxed at your marginal rate.
For example, if you withdraw $30,000 from your RRSP and your marginal tax rate is 30 percent, you will owe $9,000 in taxes on that withdrawal. Large withdrawals could push you into a higher tax bracket, which can result in a higher tax rate on the additional income.
To help manage taxes on withdrawals, the government applies a withholding tax at the time of withdrawal. The rate depends on the amount withdrawn:
Withdrawal Amount | Withholding Tax Rate (Except Quebec) | Quebec Rate |
$5,000 or less | 10% | 5% federal + 14% provincial |
$5,001–$15,000 | 20% | 10% federal + 14% provincial |
Over $15,000 | 30% | 15% federal + 14% provincial |
While the withholding tax covers some tax liability, it may not fully cover your total taxes owed. It is important to plan to ensure you have enough funds set aside to pay any additional taxes at year-end.
Strategies to Minimize Taxes on Withdrawals
- Spread Out Withdrawals
Avoid large one-time withdrawals that could push you into a higher tax bracket. Instead, take smaller, consistent withdrawals over time to keep your taxable income steady. This approach also allows you to better manage your annual expenses and avoid unexpected tax burdens.
- Plan Around Other Income
Coordinate RRSP withdrawals with other sources of income, such as Canada Pension Plan (CPP) benefits or Old Age Security (OAS), to avoid exceeding income thresholds. By timing your withdrawals strategically, you can reduce the risk of OAS clawbacks and keep more of your government benefits.
- Pension Income Splitting
If you are married or have a common-law partner, consider splitting RRIF withdrawals to lower your tax burden. This strategy can be particularly effective if one partner is in a lower tax bracket.
- Withdraw Before Age 71
If you retire early and have a lower income, withdrawing funds before converting your RRSP to an RRIF can reduce taxes. This window of opportunity allows you to manage your taxable income efficiently before mandatory withdrawals begin.
Alternatives to RRIFs
If you prefer not to convert your RRSP into an RRIF, there are other options to consider. For instance, you can purchase an annuity, which provides guaranteed income for life or a specified period. Annuities can offer stability but lack the flexibility of RRIFs.
Additionally, you may withdraw all funds from your RRSP in a lump sum. However, this option is rarely recommended due to the high tax implications.
How to Build a Sustainable Withdrawal Plan
Begin by estimating your annual expenses, accounting for inflation, and factoring in any additional income sources. A general rule of thumb here is to withdraw no more than four percent of your savings annually to reduce the risk of running out of funds. However, this may vary depending on your individual circumstances, market conditions, and life expectancy.
Final Thoughts
Understanding what happens to your RRSP after retirement is crucial for building a secure financial future. Transitioning to an RRIF, managing withdrawals, and planning for taxes are all essential steps to ensure your savings last.
Using smart strategies and exploring your options will allow you to make the most of your retirement savings and enjoy the financial freedom you have worked so hard to achieve. Retirement planning is about finding the right balance for a stable and fulfilling future.