TaxMatters@EY: Family Wealth Edition – April 2024

Gael Melville, Vancouver, and Jennifer Chandrawinata, Toronto

If you’re thinking of retiring soon, you’ll need to consider what sources of income you can draw on in your retirement years. Depending on where you have worked during your career or if you owned your own business, you may have a company or public sector pension plan, or you may need to rely principally on your own savings and investments.

If the bulk of your retirement income will come from a registered retirement savings plan (RRSP), one of the most important financial decisions you will make will be what to do with your RRSP when it’s time to start drawing a retirement income. The decisions you make regarding your RRSP could go a long way to determining whether your years of savings will provide the income you need for a comfortable retirement.

Let’s take a look at some of the main questions you may be asking yourself at this important time.1

When do I have to withdraw money from my RRSP?

You may withdraw money from your RRSP at any time after you open it, even before you retire. However, any money you withdraw will generally be included in your income in the year of withdrawal and so will be subject to tax at your current marginal tax rate.2 Therefore, when planning for retirement, most people choose not to withdraw their money from their RRSP all at once.

Your RRSP will have a maturity date provided under the terms of the plan. This is the date by which you must close your RRSP account and withdraw all the money from it, or select a maturity option to begin receiving retirement income.

Your RRSP must mature by the end of the calendar year in which you turn 71. Therefore, if you turn 71 in 2024, your RRSP must mature by December 31, 2024 and you will be unable to make any further contributions to your RRSP after that date.3

However, you do not have to wait until your plan matures to obtain retirement income from your RRSP. Should you wish to begin receiving a retirement income earlier, you can do so subject to any other restrictions you may have agreed to when you originally set up your RRSP.

My RRSP is maturing: what are my options?

There are a number of maturity options available to enable your RRSP to provide a retirement income from your plan assets. You can select one or a combination of these available maturity options. Each one will provide you with retirement income in varying amounts over different periods. Each option is discussed below:

Note that if you elect to withdraw the excess amount for a year via a series of instalments instead of in one lump sum, the applicable withholding tax percentage will be based on the total amount of the instalments, rather than on the gross amount of each individual instalment.

If you discover, when you prepare your tax return, that not enough tax was withheld from the RRIF payments you received, you will have to pay the additional tax. Alternatively, if too much tax was withheld from the payments, the excess will be refunded to you.

When planning for withdrawals, it is important to make certain you have sufficient cash available within the RRIF to fund the withdrawals. Should you choose to withdraw assets in kind from your RRIF instead of withdrawing cash, the fair market value of the withdrawn assets will need to be included in your income for the year, and you must still have sufficient cash in the plan to pay the required withholding tax.

When you file your annual income tax return, you may end up paying no tax or a small amount of tax on the annual amount withdrawn from your RRIF if you are entitled to claim various non-refundable tax credits, such as the age amount and pension income amount, or if you are able to split pension income with your spouse or partner. You could even find that the minimum withdrawal requirement is more than what you need to fund your retirement living costs. In this case, you may wish to consider depositing the extra amounts withdrawn into your tax-free savings account (TFSA), assuming you have contribution room available. This will allow you to continue to grow your investments tax-free.

What happens if I don’t select a maturity option by the end of the year I turn 71?

At the beginning of the year you turn 72, if you have not selected a retirement income option, then your RRSP will mature and the plan will terminate. At that time, the entire value of your RRSP will become payable to you, will be included in your income for that year, and will be subject to tax at your marginal tax rate. Having said that, your financial institution may have an automatic rollover clause in the RRSP contract that would automatically move your RRSP to a RRIF. Speak with your financial advisor or your financial institution to confirm the terms of your RRSP contract.

If your RRSP has significant assets, having the entire value of your RRSP included in your income for the year is not usually desirable, because of the high tax cost associated with being in a higher income bracket. Therefore, you should be careful to review your RRSP options sufficiently early to allow time for any planning you wish to perform and for your financial institution to process the maturity option or options you select.

What are my options for my locked-in RRSP?

Under federal and most provincial pension legislation, the proceeds of locked-in RRSPs or locked-in retirement accounts (LIRAs) must generally be used to purchase a life annuity at retirement or must be converted to a life income fund (LIF), a locked-in retirement income fund (LRIF) or a prescribed retirement income fund (PRIF). Because these proceeds originate from a pension plan that is intended to provide retirement income for your life, you generally cannot use them to acquire a term annuity and you cannot withdraw all the funds in cash.

LIFs, LRIFs and PRIFs are all forms of RRIFs, so there’s a minimum annual withdrawal amount. But unlike RRIFs, there are also maximum annual withdrawal limits for LIFs and LRIFs, and in some provinces LIFs must be converted to life annuities by the time you turn 80.

Tax-deferred transfers are generally permitted between all these plans, so you might transfer assets from a LIF back to a LIRA (if you’re under 71) if you change your mind about receiving an early pension. Another option is to transfer funds from a LIF to an LRIF to avoid annuitization when you turn 80.

1. For example, if you own shares of a privately owned business, another source of retirement income may be dividends you receive on your shareholdings, or if you own a rental property, the rental income may be a source of retirement income.
2. Your financial institution must also withhold tax from any RRSP withdrawals you make. The withholding tax rates are the same rates as those applied to payments from a RRIF — see RRIF tax withholdings.
3. However, if you have any remaining unused RRSP deduction room after your final RRSP contribution and your spouse or common law partner is younger, you may continue to contribute to a spousal or common law partner RRSP until the end of the year in which they turn 71.
4. Sources: www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-retirement-savings-plans-registered-retirement-income-funds-rrsps-rrifs/registered-retirement-savings-plans-registered-retirement-income-funds-rrsps-rrifs.html#rts and www.revenuquebec.ca/en/businesses/source-deductions-and-employer-contributions/special-cases-source-deductions-and-employer-contributions/payments-from-an-rrsp-a-vrsp-a-prpp-or-a-rrif/.
5. Canadian residents outside the province of Quebec.
6. Residents of the province of Quebec. Includes federal withholding.