We have become accustomed to using RRSP accounts as part of our strategy for saving for our retirement. These convenient vehicles provide us with welcome tax deductions for our investment deposits every year, and deferral of taxes on any income or capital gains achieved on our investments within the RRSP account. However, many Canadians do not have a very clear understanding about exactly how the financial assets in their RRSP accounts can ultimately be used to provide a source of income at retirement. Specifically, there is a great deal of misunderstanding concerning the structure and use of registered retirement income fund (RRIF) accounts.

The best way of looking at this is to consider that both RRSP and RRIF accounts are simply tax-protected holding accounts for your investments. You create the RRSP account, and then you “fill” it with a portfolio of investments. You fill it by making RRSP contributions, which are then invested on your behalf in accordance with your objectives and instructions. Each individual investment may produce interest or dividend income and/or growth in the form of capital gains. No taxation occurs on any of this until you withdraw something from the holding account.

You may, of course, choose to make a withdrawal from your RRSP account at any time and the proceeds will be taxed at your marginal tax rate. Since most of you will have lower marginal tax rates after retirement, it is generally part of the retirement plan to put off making any withdrawals until you are retired. If you retire at any time before age 69 you may want to start making withdrawals that would involve selling off part of your investment holdings. Any such withdrawals are taxable. What remains is still protected from tax on any growth or current income. You may want to do this, but you are not required to make any withdrawals until you are 70!

At the end of the year in which you turn 69, the situation changes. The tax laws that govern RRSPs dictate that your RRSP ac-count must “mature” by the end of that pivotal year. While there are a number of options available to investors, the most common op-tion is to “convert” their RRSP account to a RRIF account. This is really a simple procedure that keeps your investments intact while transferring them to your new RRIF holding account.

Think of your RRSP account as an inverted umbrella into which you make your RRSP deposits and within which your deposits are turned into investments. Anything within the umbrella is protected from current taxation. Now, when you turn 69 we simply invert the umbrella. Your investments are still there and are still protected from current taxation as long as they are still in the umbrella.

At this point you are no longer able to make any additional deposits, and you must commence withdrawals of at least a minimum annual amount (the current minimum amounts are shown in the accompanying table). Whatever investments remain in the account can continue to grow in value. Making minimum (or larger) withdrawals will obviously require a partial liquidation of your investment assets, but at no time are you required to make a wholesale liquidation of all your investments, so you retain flexibility and control.

There are alternatives to converting your RRSP to a RRIF account. You may choose to liquidate and withdraw all your assets at one time, but this would be treated as current income and expose you to the highest marginal taxes. You could also choose to convert your RRSP directly into an annuity (a pension-like vehicle that provides a certain income stream for life but generally no growth potential).

This article should provide you with a basic understanding. Please talk to your advisor for a more detailed review of your options.