RRSPs are a great savings vehicle, but they can't stay as RRSPs forever. By the end of the year in which you turn 71, you must either cash out your RRSPs (and pay income tax on the full amount), purchase an annuity, or convert them to a Registered Retirement Income Fund (RRIF), or choose some combination of the three. An RRIF is a tax-deferred savings vehicle into which you cannot contribute, and are forced to withdraw at a certain minimum rate. Read on for details...
RRIFs and contributions
It's possible to convert an RRSP to an RRIF anytime, but it is a one-way street. You can't convert an RRIF back to an RRSP. While an RRSP allows for contributions up to you contribution room, contributions to an RRIF are not allowed. This means that it's best to convert when you are sure you won't need to contribute anymore.
RRIFs and withdrawals
Withdrawals from an RRIF are considered income and are taxable at your full tax bracket. There is no maximum annual withdrawal (though you might pay a lot of taxes if you don't spread your withdrawals over several years), however there is a minimum withdrawal amount that depends on your age.
If you are below 71, the minimum withdrawal percentage can be calculated from your age as 1/(90 - age). If you are 72 or older, there is a table on the Revenue Canada website, which caps out at 20% when you turn 94. The idea is that you are supposed to use the RRIF to provide income when you are retired, and not use it to shelter taxes between generations.
Withdrawals from an RRIF can be made in kind, which means that the value of the RRIF needs to decrease by a certain amount, but the actual securities in the account do not need to be sold, instead they can be moved to a taxable account. At this point, the full market value of the transferred security would be considered a withdrawal and classified as taxable income.
When to convert
There don't appear to be any advantages to converting an RRSP to an RRIF before the last allowed moment, that is the end of the year in which you turn 71. When you convert an RRSP to an RRIF, you can choose whether to use your age or your spouse's age for the minimum withdrawal amounts. Because these determine the minimum withdrawal amounts, it makes sense to use the age of the younger spouse.
Please contact CJ Capital with any questions you have on RRIFs or RRSPs.