FILE 109 / DOSSIER C · RRSPs & RRIFs
/ 6 MIN READ
Why some retirees open a RRIF before they have to
The deadline is the end of the year you turn 71, but RRIF income from 65 qualifies for the pension income amount and for pension splitting. RRSP withdrawals do not.
Most people know the date by which an RRSP has to become something else: the end of the year they turn 71. Fewer notice that nothing stops them from turning some or all of it into a registered retirement income fund much earlier, and that two tax rules start to work differently once they do, from the age of 65.
That is why some retirees open a RRIF in their mid-sixties, sometimes with only a small part of their savings. This file sets out the two rules involved, what an early RRIF commits you to, and who the idea is most likely to matter for.
The deadline everyone knows
By 31 December of the year you turn 71, an RRSP has to mature. The usual choices are to transfer it to a RRIF, use it to buy an annuity, or withdraw it as taxable cash. Most people choose a RRIF, which keeps the money invested and requires a minimum withdrawal each year.
But 71 is a deadline, not a starting gate. A RRIF can be opened at any age, and an RRSP can be converted in part, leaving the rest as an RRSP until later.
The credit RRSP withdrawals miss
The federal pension income amount is a non-refundable tax credit on up to $2,000 of eligible pension income a year, with provincial versions alongside it. The Canada Revenue Agency’s list of what counts as eligible income at 65 or older includes RRIF income and life income fund payments. It does not include ordinary lump-sum RRSP withdrawals, and it does not include CPP or OAS.
For someone whose only pension income is CPP and OAS, that means the credit goes unused unless something eligible is added. A small, regular RRIF payment from 65 is one way people add it. Someone who already has a workplace pension usually uses the credit already, because life annuity payments from a registered pension plan qualify.
Splitting with a spouse
The second rule is pension income splitting. Couples can allocate up to 50% of eligible pension income from one spouse to the other on the tax return, using form T1032, which both sign each year. The CRA’s list of eligible income for splitting includes, at 65 or older, RRIF payments, including life income fund payments, and RRSP annuity payments. CPP, QPP and OAS cannot be split this way.
Lump-sum RRSP withdrawals are not on the list at any age. A spouse drawing on an RRSP before 71 to cover living costs is therefore creating income that has to stay on their own return. The same money paid out of a RRIF from 65 can be shared.
The same $2,000, two ways
| Rule | Lump-sum RRSP withdrawal | RRIF payment |
|---|---|---|
| Taxable as income | Yes | Yes |
| Eligible for the pension income amount at 65+ | No | Yes |
| Can be split with a spouse at 65+ | No | Yes |
| Tax withheld at source | 10% outside Quebec ($200) | None on the minimum; above it, RRSP rates apply |
| Required every year | No | The minimum, from the year after opening |
The table shows why the choice is about more than convenience. The amount of money is the same; the treatment on the return is not.
An illustrative couple
Consider a hypothetical couple, both 66. One has $20,000 a year of RRIF income on top of CPP and OAS. The other has only CPP and OAS. Splitting allows up to half the RRIF income to be reported by the second spouse.
The allocated amount can also let the receiving spouse claim the pension income amount, provided they meet the age condition themselves. Whether splitting saves tax, and how much, depends on the gap between the two incomes. For couples with similar incomes it may change nothing.
What opening early commits you to
A RRIF is less flexible than an RRSP in one important way. Once it is set up, a minimum amount must be paid out every year, starting the year after the RRIF is opened. Before 71, the minimum is the balance at the start of the year divided by 90 minus your age, or your spouse’s age if you chose that when setting it up. Someone who opens a large RRIF early may be required to withdraw more than they need, and pay tax on it, years before they would otherwise have done so.
That is why the idea is usually discussed with a small RRIF, sized so that its minimum, or a slightly higher fixed payment, roughly matches the $2,000 credit or the amount a couple wants to split. The rest can stay in the RRSP until it is needed or until 71.
Extra income has other effects too. It counts towards the threshold for the OAS recovery tax and towards income-tested benefits; see the form that can lower OAS clawback deductions.
Who this matters for
- You are 65 or older and your only pension income is CPP and OAS.
- You are drawing on an RRSP by lump-sum withdrawals; see what withholding tax takes from an RRSP withdrawal.
- You have a spouse with much lower income, and your savings are in RRSPs rather than a workplace pension.
- You have a locked-in account that could become a life income fund, which is treated like a RRIF for these rules; see what a locked-in account turns into.
The short version
An RRSP has to become a RRIF, an annuity or cash by the end of the year you turn 71, but a RRIF can be opened earlier. From 65, RRIF income qualifies for the pension income amount and for pension splitting; lump-sum RRSP withdrawals do not. The price is a required minimum withdrawal every year, which is why some retirees open a small RRIF early rather than converting everything at once.
- Canada Revenue Agency — Line 31400, pension income amount — up to $2,000; eligible income at 65 and over and under 65.
- Canada Revenue Agency — Pension income splitting — up to 50%, form T1032, RRIF and LIF income from 65.
- Canada Revenue Agency — Minimum amount from a RRIF — minimum starts the year after the RRIF is set up; spouse’s age option.
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