Avoiding the RRSP to RRIF Trap: Smarter Retirement Withdrawals
Mar 28, 2025
When it's time to begin withdrawing money form your RRSP in retirement, you'll need to convert it to a RRIF — a Registered Retirement Income Fund. At Parallel Wealth, we’ve seen many Canadians fall into a costly trap during this conversion, often resulting in tens or even hundreds of thousands of dollars in unnecessary taxes. In this blog, we’ll break down what this trap is, explain how RRIFs work, and walk through an example using our financial planning software to show how smart planning can help you avoid common mistakes.
What is a RRIF and When Do You Need One?
Your RRSP must be converted into a RRIF by December 31 of the year you turn 71. This is not a taxable event and doesn't require selling your investments — it's simply a change in the account type. For example, if you hold shares of ABC Corp in your RRSP, those same shares will remain in your RRIF. Most financial institutions can complete the conversion process for you.
Once your RRSP becomes a RRIF, you’re required to begin withdrawals starting in the year you turn 72. The government sets a minimum annual withdrawal rate based on your age. For instance, at age 65, the minimum withdrawal is 4% of your RRIF balance at the end of the previous year.
All withdrawals from a RRIF are considered fully taxable income. While RRSP contributions gave you a tax deduction when you contributed, the government now collects tax as the money is withdrawn.
The RRSP to RRIF Trap: What You Need to Know
There are two common mistakes many retirees make:
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Waiting until age 71 to convert their RRSP to a RRIF
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Only withdrawing the minimum amount from their RRIF
At first glance, delaying RRSP withdrawals can seem smart — especially if you’re relying on TFSA income, non-registered accounts, or government benefits like CPP and OAS. Many retirees are proud to say they’ve paid little or no tax in the early years of retirement.
But here’s the catch: pushing taxable income down the road can result in higher overall taxes later. When large RRIF withdrawals become mandatory at age 72, you may face:
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OAS clawbacks
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Higher marginal tax rates
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Larger estate taxes at death
Strategically drawing down your RRSP earlier can reduce your lifetime tax bill and create more financial flexibility.
Real-Life Example: John’s Retirement Strategy
Let’s look at a case study. John is 65 years old with $650,000 in his RRSP and $125,000 in a TFSA. He’s considering starting CPP and OAS right away.
Scenario 1: Delayed RRSP Withdrawals In this plan, John delays withdrawals from his RRSP. For the first few years, he lives off government benefits and TFSA income. While he pays virtually no tax in those early years, he runs into trouble later. By age 69, he has depleted his TFSA and must begin tapping into his RRSP. Once RRIF withdrawals begin at 72, his taxable income spikes, pushing him into a higher tax bracket. The end result? A larger tax bill and limited flexibility later in life.
Scenario 2: Early RRSP Withdrawals In the alternate strategy, John converts his RRSP to a RRIF at age 65 and delays CPP until age 70. He draws more than the minimum from his RRIF and allows his TFSA to continue growing untouched. The benefits of this approach include:
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$133,000 more in after-tax estate value
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Zero tax owed on RRSP/RRIF assets at death
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More flexibility throughout retirement
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An extra $1,500/year in spendable income, adjusted for inflation
This comparison shows how small adjustments — like converting early and drawing strategically — can make a big impact over time.
Why Early RRSP Withdrawals Make Sense for Most Retirees
While everyone's situation is unique, most Canadians benefit from drawing down their RRSPs earlier than age 71. Doing so can help:
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Avoid high RRIF withdrawals later
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Minimize OAS clawbacks
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Smooth out your tax rate over time
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Leave a larger estate
Working with a financial planner allows you to model these strategies and find the approach that maximizes your after-tax retirement income.
Key Takeaways
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Convert your RRSP to a RRIF before age 71 to increase flexibility.
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Withdraw more than the minimum when it makes tax sense to do so.
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Don’t delay RRSP withdrawals just to avoid short-term tax bills.
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Use financial planning software and expert advice to map out your strategy.
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Ready to Build a Smarter Retirement Plan?
At Parallel Wealth, we specialize in retirement income strategies tailored to Canadians. Our team provides fee-for-service financial planning and uses advanced software to map out scenarios just like John’s — helping you get the most from every dollar.
Looking for a more detailed explanation? Check out the video below!
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Parallel Wealth Financial Group Inc. is based in Langley, British Columbia with offices in Calgary, Alberta and the Niagara Region in Ontario. We are here to serve Canadians with their financial planning needs.