Plan Your Tax Strategy for When You Turn 71

The age of 71 is when you will be required to begin withdrawing money from your Registered Retirement Savings Account (RRSP). There’s no way to avoid it, or the taxes you will pay. However, it could be a smart tax strategy to begin those withdrawals much earlier.

You must convert your RRSP into a Registered Retirement Income Fund (RRIF) at the end of December in the year you turn 71. You are expected to use this money as a pension. So, do it in a way that is to your best advantage. You need to create an optimal tax strategy for the back end of your retirement.

The rate of required withdrawals will begin rising. At age 71, your minimum withdrawal amount is 5.28% of your RRIF. Then it rises steadily; to 6.82% at age 80 and 11.92% when you turn 90. Your tax bracket could rise accordingly. It forces you to dip into your capital for income, and of course there’s all that deferred tax the government is expecting to receive. Your RRIF is income is fully taxed as income based on your tax bracket and does not receive preferred tax treatment like capital gains.

One option is to convert your RRSP into a RRIF before the age of 71. It could make sense to do this, and then draw funds from your RRIF well before you’re required to.

This can average out your taxable income, helping you to stay within a lower tax bracket throughout your retirement. By doing so, you can also avoid having your Old Age Security benefits clawed back.

A lot will depend on your other income from investments and pensions. If you don’t need the money to live on, you can strategically invest it, such as within your Tax-Free Savings Account (if you have the space). Manage your cash flow in retirement as strategically as you did in your working life. Think about your options for creating a balanced income to keep your tax bill lower.

Another opportunity to reduce the tax bill is splitting your pension income with a spouse in a lower tax bracket. Income splitting is permitted in an RRSP from the age of 65. Some company pensions can be split at any time.

Plan your retirement income well in advance, to minimize your tax load. Consult with your Financial Advisor to explore different scenarios based on your age and income sources.