RRSP holders often wonder when they should convert their RRSP into a RRIF or an annuity. The answer is based on their cash needs.

The main difference between an RRSP and a RRIF is the minimum withdrawal required for the RRIF. Therefore, if you don't need cash, you should generally wait until the deadline before you cash in your RRSP, which is December 31 of the year in which you turn 71.

Also, if you only need cash once in a while, for a special project for instance, then it is also better if you don't convert your RRSP before the deadline. However, if you have a regular need for cash, it would be preferable if you converted part or all of your RRSP into a RRIF to avoid the fees charged for withdrawing money from an RRSP.

The only situation that would call for converting an RRSP even when there was no need for cash is when you can benefit from the tax credit on a retirement income because you're not receiving a pension from your former employer. When you reach 65, you can use $2,000 ($1,500 for Quebec) from your RRSP every year, transform it into a RRIF, and then withdraw it afterwards.

The Federal tax credit for a retirement income applies to people aged 65 or over and sums withdrawn from an annuity or RRIF transferred from an RRSP. However, it does not apply to sums withdrawn from an RRSP. In other words, you must convert your RRSP to get the retirement income credit. In Quebec, however, the total pension income amount is reduced by 15% for those with a joint net income exceeding $29,290 (2007), as applicable. Take note, however, that in Quebec, if you'd designated an ex-spouse as your beneficiary, the divorce would render that designation (as beneficiary, not as the insured party) of your life insurance null and void.

Remember that if you are or will be 71 this year, you have until December 31 to convert your registered retirement savings plan (RRSP) into a retirement income. You can convert it into a registered retirement income fund (RRIF) or an annuity, or a combination of the two. You can also collapse your RRSP without converting it, but this option will cost you more since you'll be paying income tax on the full amount you withdraw.

Ask one of our advisors to help you make the best choice.