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Converting Your RRSP

When and How to Convert Your RRSP

By law, you are allowed to contribute to and keep your RRSP until December 31 of the year in which you turn 71. Then, you will have to convert it. You have several retirement income options: a Registered Retirement Income Fund or an annuity.

People are retiring earlier these days, often at age 55. In this case, is it better to convert your RRSP immediately at age 55 or wait until you turn 71? When the time comes for you to convert your RRSP into retirement income, you have some options: a Registered Retirement Income Fund (RRIF) or an annuity?

Convert your RRSP now or when you turn 71?

The answer depends on your personal situation but generally, it is better to convert your RRSP as late as possible.

You will be able to delay the conversion of your RRSP if your income is sufficient. You may draw an income from various sources:

  • benefits from a company pension plan
  • public annuities
  • personal non-registered savings
  • personal income (from, for example, a rental unit or investments)

If you use your other sources of income first, the money in your RRSP will continue to grow tax-free.

However, if you need additional cash to pad your budget, you might have to move up conversion deadline. Then, you may convert your RRSP, in full or in part, into a retirement income plan.

If you only need cash occasionally (to travel, for example), it would be wise to withdraw only the amount you need from your RRSP without converting it all right away.

LIF or annuity?

When the time comes for you to convert your RRSP into retirement income, which option should you choose?

Let's compare the characteristics of each one. An annuity requires no management on your part (the institution which sold it to you manages it), while a RRIF gives you total control of your capital and lets you choose your investments.

An annuity protects you from market fluctuations and ensures a stable retirement income. You know exactly how much you will receive, which makes it easier to manage your budget. However, this stability provides little leeway if something unexpected comes up or if you want to carry out a project (for example, a vacation).

A RRIF allows you to withdraw a different amount each time (subject to the legislated annual minimum). This gives you more freedom so you can take a cruise, help out your children financially or enjoy your favourite hobby.

Stability or flexibility?

Before you decide, you should consider the big picture:

  • your investor profile
  • your financial needs
  • your tax burden
  • your age
  • your health
  • how much money you wish to leave your loved ones

Your Desjardins advisor can help you do a complete analysis of your financial situation and then, you can make an enlightened decision.

In some cases, it may be best to combine both retirement options; convert a portion of your RRSP into a RRIF and use the balance to purchase an annuity. Or, you can use your RRIF to purchase an annuity any time you wish; just remember that once you purchase an annuity, you cannot change your mind.