Q:
When can I convert my RSP to a RIF (Retirement Income Fund)?
A: This question comes from Randy, who asked a series of related questions that I'll tackle as well.
The good news is that you can convert your RSP to a RIF at any time, even though most people tend to do it either (a) when they retire, or (b) when they're no longer eligible to hold RSPs – by the end of the year in which you turn 71. So this means if you retire at 63, for example, and want to start drawing down on your RSPs to supplement any other sources of income you have coming in, then you can absolutely do so.
What happens if I decide to go back to work? That is, can I open another RSP and start contributing again?
The answer is yes, depending on your age. You can continue to hold RSPs until the end of the year you turn 71.
So what happens to the RSPs I've already converted to a RIF? Can I stop receiving payments from them, since I'm working again?
This is the real issue with this sort of situation – the answer's no. Once you convert an RSP to a RIF, you have to withdraw at least the minimum payment amount as long as the account is open. The interesting thing about this is that the minimum payment for a 71-year-old is 5.28% of the account balance at the start of the year, but for a 55-year-old, for example, the minimum payment is much lower – under 3%. So it's even possible in this hypothetical scenario for your RSP contributions to be greater than your RIF withdrawal amounts. If that were the case, you'd be able to offset the taxation of your RIF withdrawal by the amount of your RSP contribution.
Randy's note ended by saying that while he's curious about all of the above, he currently lives paycheque to paycheque, with little to no money left over at the end of each month. My advice to Randy is not to worry yet about the RSP to RIF conversion mechanics. It sounds like there's still a long way to go before then, so it's a good time to take stock of your financial situation and make sure you've prioritized your goals.
Here's how I'd suggest prioritizing, as applicable:
1) Pay off any high-interest debt you have (before worrying about retirement savings)
2) Run a surplus every month (i.e. have more coming in than going out)
3) Start an emergency fund (I recommend a high-interest TFSA savings account)
4) Save for your retirement and kids' education in equal measures, if you're able
If you have a question that Joe can answer in a future article or have a topic suggestion, please email it to: askanadvisor@tangerine.ca
This article is intended to provide general information only about RSPs and RIFs. If you need further information about your specific circumstances you should speak to an investment advisor.
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