Should you max out your RRSP before converting it to a RRIF?

My husband and I retired last September. We have moved into a condo and are now travelling. Enjoying life but I’m concerned about his RRIF. My husband turns 71 in June 2025. So, I understand we can contribute to his RRSP for 2025 before he turns 71 and claim the contribution for the 2025 tax year, but what happens next?

—Chris

When to convert an RRSP to a RRIF

Congratulations on your retirement, Chris. Glad to hear you and your husband are enjoying this first year so much.

I am guessing you have downsized your home to move to a condo and now have money to contribute more to your registered retirement savings plans (RRSPs) as a result. First, we will start with a quick rundown of how RRSP to RRIF conversion works.

Converting an RRSP to a RRIF

A registered retirement income fund (RRIF) is the most common withdrawal option for RRSP savings. By December 31 of the year you turn 71, you need to convert your RRSP to a RRIF or buy an annuity from an insurance company. So, the conversion must take place not by his June birthday, Chris, but by December 31, 2025. You have a little more time than you might think.

A RRIF is like an RRSP in that you can hold cash, guaranteed investment certificates (GICs), stocks, bonds, mutual funds, and exchange traded funds (ETFs). In fact, when you convert your RRSP to a RRIF, the investments can stay the same. The primary difference is you withdraw from it rather than contributing to it.

Withdrawing from a RRIF

RRIFs have minimum withdrawals starting at 5.28% the following year if you convert your account the year you turn 71. This means you have to take at least 5.28% of the December 31 account value from the previous year as a withdrawal. Those withdrawals can be monthly, quarterly or annually, as long as the minimum is withdrawn in full by year’s end. Each year, that minimum percentage rises.

There is no maximum withdrawal for a RRIF. Withdrawals are taxable, though. If you are 65 or older, you can split up to 50% of your withdrawal with your spouse by moving anywhere between 0% and 50% to their tax return when you file. You do this to minimize your combined income tax by trying to equalize your incomes.

You can base your withdrawals on your spouse’s age and if they are younger, the minimum withdrawals are lower.

Contributions before you convert

If you have funds available from your condo downsize, Chris, you could contribute to your husband’s RRSP. He can contribute until December 31, 2025. If you are younger than him, he can even contribute to a spousal RRSP in your name until December 31 of the year you turn 71, whereby he gets to claim the deductions, but the account belongs to you with future withdrawals made by you.

However, just because you have money to contribute, it doesn’t mean you should. Say your husband has $10,000 of RRSP room and his taxable income from Canada Pension Plan (CPP), Old Age Security (OAS), investments, and other sources is $50,000. He could contribute and deduct that $10,000 to reduce his taxable income to $40,000. In most provinces, the tax savings would be about 20%. His tax refund would be about $2,000.

When his RRIF withdrawals begin, his taxable income will rise. His tax bracket could be higher. Rates jump from about 20% to about 30% in most provinces somewhere around the $50,000 of taxable income threshold and become significantly higher at $91,000 of income for an OAS recipient subject to the 15% pension recovery tax, commonly referred to as a “clawback.” So, that RRSP contribution that saved him 20% could cost him 30% or more when withdrawn from his RRIF.

If you expect to be in a higher tax bracket once you start withdrawing from your RRIF, it probably does not make sense to contribute to an RRSP. If you have a high income year because you are working or sold a cottage or have another extraordinary income event, that would be a reason to consider contributing. But when retired, and before starting RRIF withdrawals, you will probably have a higher income and tax rate later.

The point is, Chris, the tax refund might feel nice, but it is a temporary consolation. You would probably be better off leaving the funds you would otherwise use to contribute to his RRSP in your tax-free savings accounts (TFSAs) or non-registered accounts. It could be worth more in the future on an after-tax basis to fund your travels or an eventual inheritance for your beneficiaries.

RRSPs may not be worth as much as you think

When you have $100 in your TFSA, it is always able to fund $100 of spending because withdrawals are tax free. When you have $100 of cash in the bank, it is the same thing. When you have non-registered investments worth $100, they may be worth less than $100 after tax if they have appreciated and you have to pay capital gains tax. But, barring a large capital gain, it will still be worth almost $100 after tax.

RRSPs and RRIFs, however, can be deceiving. When you withdraw from these tax-deferred accounts, the tax payable tends to range from 20% to 50%. So, $100 in an RRSP may only be worth $50 to $80 in terms of the potential after-tax spending it can fund. For someone subject to OAS clawback, the after-tax value of an RRSP withdrawal might be less than $40 depending on income and province of residence.

To be clear, RRSPs are great saving tools when you contribute at a high income and withdraw at a low income. But it is not a foregone conclusion that you should always contribute to your RRSP.

Think twice about topping up the RRSP

In summary, Chris, it may or may not make sense for your husband to contribute to his RRSP. Based on what you have shared, he may pay more tax on the future RRIF withdrawal than he will save on the initial contribution. You may be better off foregoing RRSP contributions even though he has RRSP room, and you have funds to contribute. In which case, you can contribute to your TFSAs or leave the funds in your TFSAs or invest in a taxable account.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.