RRIF minimum withdrawals — the schedule you cannot opt out of

Everything about an RRSP is voluntary until it isn’t. There is a deadline, it is fixed, and after it a schedule takes over.

The deadline

By 31 December of the year you turn 71, an RRSP must be converted. Three options exist: convert it to a RRIF, buy an annuity, or withdraw the whole balance in cash.

The third is almost never sensible — the entire amount becomes taxable income in one year, which for most balances means the top marginal rate. If nothing is done, that is effectively the outcome imposed.

Note the year, not the birthday. Turning 71 in December gives you the same deadline as turning 71 in January.

What happens next

From the year after conversion, a minimum must be withdrawn annually. It is a percentage of the fund’s fair market value on 1 January, set by age:

Age	Minimum	Age	Minimum
71	5.28%	84	8.08%
72	5.40%	85	8.51%
73	5.53%	86	8.99%
74	5.67%	87	9.55%
75	5.82%	88	10.21%
76	5.98%	89	10.99%
77	6.17%	90	11.92%
78	6.36%	91	13.06%
79	6.58%	92	14.49%
80	6.82%	93	16.34%
81	7.08%	94	18.79%
82	7.38%	95 and over	20.00%
83	7.71%

Below 71 a RRIF may still be opened, and the factor is formulaic rather than tabled. The minimum is simply smaller.

There is no maximum. The schedule is a floor. Withdrawing more is always allowed, and is sometimes the better plan.

What it does to a dividend portfolio

Three consequences, in rough order of how often they bite.

The withdrawal is fully taxable as ordinary income, whatever it was inside. The RRSP erased the character of the income on the way in. An eligible Canadian dividend that would have enjoyed the dividend tax credit in a taxable account comes out of a RRIF taxed like interest. That is the price of the deferral, and it arrives all at once at 71.

The percentage rises while the balance may not. At 71 the minimum is 5.28%, which a reasonable portfolio might sustain from income. By 85 it is 8.51%, and by 95 it is a fifth of the fund every year. Somewhere along that curve the withdrawal stops being income and starts being liquidation, regardless of what the holdings pay.

It is a percentage of a January value. If markets fall in February, the required withdrawal does not fall with them. A bad year forces selling at the bottom, which is the sequence-of-returns problem in its most mechanical form.

The interaction people miss

The RRIF withdrawal counts as net income, and net income is what the OAS recovery tax is tested against.

Someone whose non-registered dividends already push them near the threshold can find the mandatory RRIF minimum pushing them over it — not because they chose to take the money, but because the schedule required it. The two systems do not consult each other.

What can be done about it

None of this is advice, but the mechanical options are worth knowing:

• Use a younger spouse’s age. The factor may be based on a spouse’s or common-law partner’s age instead, elected at the time the RRIF is set up and irrevocable afterwards. A younger spouse means a smaller minimum for the rest of the plan’s life.
• Withdraw before 71. Drawing an RRSP down in lower-income years — after employment ends, before CPP and OAS begin — can move income out of the years when the minimum, CPP, OAS and any pension all stack together.
• Withhold appropriately. The minimum payment itself has no withholding tax deducted at source, which surprises people at filing time. Anything above the minimum does.
• In-kind withdrawal. A RRIF withdrawal can be satisfied by transferring securities out rather than selling them, though the tax is identical.

Where to go next

• The OAS clawback and dividend income
• Which account to draw down first
• TFSA vs RRSP for dividends