Vesta Advice Series – July 24, 2025

Over my years as a Financial Planner, I have often met clients making the same mistake in their personal finances: overly large RRIF (or RRSP) balances in relation to their age, usually in combination with only taking the minimum payments.

Often, this stems from a history of good intentions and savings habits: regular RRSP contributions, living within your means, and investing your money wisely.  It can be hard to switch gears from accumulating wealth in your working years to depleting your savings in retirement.  More than once, I have heard clients say they have put off thinking about their RRSPs as long as possible, as they don’t really need the cashflow now that they are retired.

Unfortunately, an oversized RRIF can lead to a huge tax liability down the road and seems to be a blind spot for many clients and advisors alike.  If this sounds like you, read on to learn more about the issue and what we can do to address it.

Understanding RRIFs

Most clients are familiar with the RRSP as a form of retirement savings to some degree, but many are a little fuzzy about the details once they retire.  To better understand the issue, we should explore two concepts: what a Registered Retirement Income Fund (RRIF) is in relation to a Registered Retirement Savings Plan (RRSP,) and how they are taxed.

If you have money in an RRSP, you may be aware that you are required to convert it to a RRIF by the end of the year when you turn 71 years of age. I could describe a RRIF as an RRSP with a hole drilled in the bottom; there is now a minimum amount of money that must be withdrawn every year following its creation, based on your age.  Crucially, that is only the minimum; you can (and often should) be taking more than that out annually.  Additionally, you can open a RRIF before the age of 71 and may benefit from doing so.  I strongly recommend meeting with a planner before taking these steps to ensure you gain full benefit and it makes sense for you.

Both an RRSP and RRIF are taxed similarly: the money inside has never paid income tax and will be treated as income the year it is withdrawn.  This forms the core of our issue: a RRIF with $500,000 means that you still have $500,000 worth of income to pay taxes on.  Canada uses a progressive tax system, which means a substantial difference in our tax bill if we spread that out over multiple years versus having the full balance be included as income in a single year.

The final piece of the puzzle ties into estate planning and something clients often shy away from thinking about: What happens to your RRIFs when you die?  If you are survived by your spouse, your executor may elect to do a spousal rollover and transfer the account as-is, effectively deferring the tax burden until later.  However, once this is no longer an option, the value of the account will be included as income during the final year, often creating a huge tax liability.

What We Can Do

Proper planning can go a long way toward minimizing your tax liability and ensure more of your money is available to you and your beneficiaries.  The earlier you begin planning a strategic withdrawal plan the better but even spreading income over just a few years can make a big difference.

To emphasize the magnitude of this issue, consider that the top combined tax bracket in BC is currently 53.5% compared to 28.2% in a more moderate range.  Although the calculation and strategies are unique to each client based on numerous factors (the income, spousal splitting, residency, etc.), it is common to avoid tax liabilities in the $100,000 range with a little foresight and planning of RRSP / RRIF withdrawals.

An objection I sometimes hear from clients is they still don’t want to take out the money – they don’t need it currently, and fear reducing their nest egg in case something happens.  I recommend you consider this more as reorganizing your money to incur as little tax as possible upon its withdrawal over time.  Once your RRIF funds have been withdrawn, they may be redistributed into a variety of options: a Tax-Free Savings Account, a non-registered investment account, gifting, or even a trust are some common examples.

I hope you have found this article helpful and encourage you to consider your goals and existing strategy.  Retirement and estate planning can be a big task, and please don’t hesitate to reach out to your Financial Planner to see how this advice can relate to you.  If you have questions, comments, or need more personalized advice, I welcome you to reach out to me directly.  Thank you for reading!