The RRSP Drawdown Question: Why Waiting Until 71 Isn’t Always the Best Retirement Plan

An RRSP statement can be reassuring. You check the balance, see that it’s holding up reasonably well, and put it away. No withdrawals. Nothing disturbed.

For someone who spent thirty years saving, that feels like responsible behaviour.

Then retirement arrives, and the habit follows you. You have some cash, perhaps a TFSA, and enough to cover the bills without touching your RRSP. Why start paying tax on withdrawals before you have to?

It’s a fair question. Leaving the money invested may suit you perfectly well.

But there’s another question worth asking before you settle into that routine: what happens when CPP, OAS and mandatory retirement-account withdrawals are all arriving at once?

A very small tax bill at 62 can be followed by a much less comfortable one at 75. Whether that happens depends on your circumstances, but waiting until 71 shouldn’t be the default simply because it’s the deadline.

What actually happens at 71?

By December 31 of the year you turn 71, your RRSP must mature. The usual choices are to transfer it to a Registered Retirement Income Fund, buy an eligible annuity, or withdraw the money as taxable income.

A direct transfer to a RRIF doesn’t trigger tax on the entire account. Your savings can remain invested, with tax generally payable as you receive withdrawals.

That distinction matters. People sometimes picture turning 71 as the moment their RRSP gets cashed out. A RRIF transfer doesn’t require that.

What it does introduce is an annual withdrawal requirement.

Beginning the year after you establish the RRIF, you must take out at least a prescribed minimum. You’re free to withdraw more.

The required percentage generally rises with age:

These percentages apply to the account’s value at the beginning of the year, using your age or an elected spouse’s age.

Suppose you’re 72 at the start of the year and your RRIF holds $800,000. Using your own age, the minimum withdrawal would be $43,200.

That withdrawal goes into your taxable income. Add CPP, OAS, a workplace pension and any taxable investment income, and you may be reporting considerably more income than you need for everyday spending.

Having that money is hardly a hardship. Still, you’d probably prefer some say over when it becomes taxable.

$800,000 × 5.40% = $43,200 in required taxable withdrawals at age 72.

The years between work and pensions

Retirement income rarely arrives in one neat package.

Someone might leave work at 60, start OAS at 65, delay CPP until 70 and wait until the deadline to convert their RRSP. Without a workplace pension, there could be several years when taxable income is much lower than it was during employment—or will be later.

Those years deserve attention.

If you live entirely from cash and TFSA withdrawals, you may pay little income tax while your RRSP stays invested. That can be useful. It can also mean passing up a chance to withdraw some registered savings at a relatively modest tax cost.

The comparison takes a little work. You need to estimate what a withdrawal would cost today, then consider the income you’re likely to have when that same money eventually comes out.

Nobody can predict decades of tax rules and investment returns precisely. You can usually make a reasonable estimate, though, and that’s better than assuming that postponing tax must always save it.

The bank’s deduction isn’t your final tax bill

This is an easy detail to misunderstand.

You request a $10,000 RRSP withdrawal, but less than $10,000 reaches your bank account. The financial institution has withheld tax.

For Canadian residents outside Quebec, the general withholding rates are:

Those deductions are payments towards your tax bill. Your actual liability is calculated when you file your return, using your total income and applicable deductions and credits. You might owe more, or some of the withheld amount might come back as a refund.

So a 20% deduction doesn’t tell you whether the withdrawal was a good decision. It tells you how much the institution sent to the government on your behalf.

When comparing withdrawal options, use the estimated final tax cost.

You can open a RRIF before 71

Age 71 is a deadline, rather than a required starting point. You can establish a RRIF earlier, and you can transfer only part of your RRSP into it.

At 65, that becomes worth a conversation.

Qualifying RRIF income can be eligible for the pension income amount if you’re 65 or older at the end of the tax year. This is a tax credit; it doesn’t make the withdrawal tax-free. If other pension income already uses the available credit, an early RRIF may provide no additional benefit from that particular provision.

Eligible RRIF income can also qualify for pension income splitting. Couples who meet the requirements may allocate up to 50% of eligible pension income to a spouse or common-law partner for tax purposes. CPP and OAS aren’t eligible under these rules.

For a couple with uneven incomes, that could make a difference.

There’s no need to convert everything just to explore these options. A partial RRIF can provide eligible income while the rest remains in the RRSP, subject to the maturity deadline.

Remember that opening the RRIF also starts the minimum-withdrawal requirement the following year.

Check the spouse’s-age option before taking payments

When arranging a RRIF, you can elect to calculate its minimum withdrawals using your spouse’s or common-law partner’s age.

A younger partner’s age generally produces a lower minimum, allowing more money to remain in the account if you don’t need it.

The election must be made before receiving payments from that RRIF, and it cannot subsequently be changed for that fund. This is worth checking while you’re completing the paperwork.

It won’t reduce the tax on a dollar you withdraw. It can reduce how much you’re required to withdraw in the first place.

There’s no prize for emptying the account quickly

Once people hear about future RRIF withdrawals, some become anxious to get the money out.

A large withdrawal can create the very income spike they were hoping to avoid. Taking $300,000 from an RRSP in one year would add $300,000 to taxable income, before counting anything else.

You also give up the account’s future tax-deferred growth.

Early withdrawals need a reason and a calculation. “I don’t want to pay tax later” isn’t enough on its own.

Sometimes the sensible choice is to leave the RRSP alone. Sometimes it’s to take a modest amount each year. And sometimes a withdrawal that looks attractive from a tax-bracket perspective becomes less appealing once income-tested benefits are considered.

The amount matters as much as the timing.

Early withdrawals need a reason and a calculation.

Decide where the spending money will come from

An RRSP and a TFSA give you different ways to fund retirement.

Ordinary RRSP and RRIF withdrawals add to taxable income. TFSA withdrawals generally don’t. That difference gives you some flexibility when paying for both regular expenses and larger purchases.

Suppose you need $60,000 for the year. You might cover some of it with CPP or a pension, some with registered-account withdrawals and some with TFSA savings.

In a year with little other taxable income, a larger RRSP withdrawal might be reasonable. In a year when taxable income is already high, TFSA money could be useful for an extra expense.

The proportions can change. You don’t have to commit at retirement to using one account completely before touching another.

Put the next twenty years on a page

Start with a rough timeline. Mark your retirement date, your intended CPP and OAS start dates, any workplace pension and the year RRIF minimums would begin.

Under each period, estimate your taxable income and how much you expect to spend. Keep TFSA withdrawals separate so you don’t accidentally treat every dollar available for spending as taxable income.

You’re looking for years when income is unusually low, and later years when several sources overlap.

Then compare a few possibilities:

• Leave the RRSP untouched until conversion.
• Make planned withdrawals during lower-income years.
• Establish a partial RRIF at 65.
• Use a different mix of RRSP, RRIF and TFSA money.

An accountant or retirement planner can help turn that rough page into a projection. Ask them to compare the after-tax results over time, including relevant benefits, rather than stopping at next April’s tax bill.

Getting comfortable with taking money out

There’s an emotional adjustment here that a spreadsheet won’t entirely solve.

You spent years protecting this account. Watching the balance fall—even because you’re using it exactly as intended—can feel unsettling.

But retirement savings were meant to support retirement. The groceries, the roof repair, a month away, the ordinary comfort of knowing the bills are covered.

You may decide that leaving your RRSP invested until 71 is the right approach. If so, it should be because the numbers support it and it suits your life.

Before you decide, have a look at the years when your income is lowest. Once those years have passed, you can’t go back and use them.