One’s 71st birthday is a very consequential event when it comes to retirement planning for Canadian taxpayers, and it’s an event which will be experienced by hundreds of thousands of Canadians during 2026.
While saving for retirement through an employer-sponsored pension plan used to be the “norm”, that hasn’t been the reality for most working Canadians for some time. Most Canadians, certainly those who work in the private sector, have for decades been saving for retirement through contributions to a registered retirement savings plan (RRSP). And, regardless of the amount saved or whether the planholder is retired, partly retired, or still in the full-time work force, every RRSP holder who reaches the age of 71 this year will be required, by the end of 2026, to make a decision on how to structure and invest their retirement income funds for the remainder of their lives.
The need to make that decision arises from the rule that all taxpayers who hold funds within an RRSP are required to collapse that RRSP by the end of the calendar year in which they turn 71 years of age – no exceptions, and no extensions. It’s a hugely consequential decision, as the course of action chosen will affect the individual’s income for the remainder of their life and, in some cases, actions taken cannot be undone.
While the actual decision is a complex one, there are actually only three options available to a taxpayer who must collapse an RRSP. They are as follows:
- collapse the RRSP and include all of the proceeds in income for that year;
- collapse the RRSP and transfer all proceeds to a registered retirement income fund (RRIF); and/or
- collapse the RRSP and purchase an annuity with the proceeds.
It’s not hard to see that the first option doesn’t have much to recommend it. Collapsing an RRSP without transferring the balance to a RRIF or using that amount to purchase an annuity means that every dollar in the RRSP will be treated as taxable income for that year. In some cases, where a substantial six figure amount has been saved in the RRSP, that can mean losing nearly half of the RRSP proceeds to income tax. And, while any balance of proceeds left can then be invested, tax will be payable on all investment income subsequently earned.
As a practical matter, then, the choices come down to two: a RRIF or an annuity. And, as is the case with most tax and financial planning decisions, the best choice will be driven by one’s personal financial and family circumstances, risk tolerance, cost of living, and the availability of other sources of income to meet such living costs.
The annuity route has the great advantages of simplicity and certainty. In exchange for a lump sum amount paid by the taxpayer, the annuity issuer agrees to pay that taxpayer a specific sum of money, usually once a month, for the remainder of their life. Annuities can also provide a guarantee period, in which the annuity payments continue for a specified time period (five years, 10 years) even if the taxpayer dies during that time. Finally, annuities can be set up as joint annuities, in which annuity payments will continue until the death of the last annuitant – such joint annuities are most often purchased by spouses. Regardless of how the annuity is structured, the amount of monthly income which can be received is determined by the amount used to purchase the annuity, the gender and, especially, the age of the annuity purchaser(s), and the prevailing interest rates at the time the annuity is purchased.
For taxpayers whose primary objective is to obtain a guaranteed life-long income stream without the responsibility of making any investment decisions or the need to take any investment risk, an annuity can be an attractive option. There are, however, some potential downsides to be considered. First, an annuity arrangement can never be reversed. Once the taxpayer has signed the annuity contract and transferred the funds, they are locked into that annuity arrangement for the remainder of their life, regardless of any change in circumstances that might mean an annuity is no longer suitable. Second, unless the annuity contract includes a guarantee period, there is no way of knowing how many payments the taxpayer will receive. If they die within a short period of time after the annuity is put in place, there is usually no refund of amounts invested – once the initial transfer is made at the time the annuity is purchased, all funds transferred belong to the annuity company. Third, most annuity payment schedules do not keep up with inflation – while it is possible to obtain an annuity in which payments are indexed, having that feature will mean a substantially lower monthly payout amount. Finally, where the amount paid to obtain the annuity represents most or all of the taxpayer’s assets, entering into the annuity arrangement means that the taxpayer will not be leaving an estate for their heirs.
The second option open to taxpayers is to collapse the RRSP and transfer the entire balance to a registered retirement income fund, or RRIF. A RRIF operates in much the same way as an RRSP, with two major differences. First, it’s not possible to contribute funds to a RRIF. Second, the taxpayer is required to withdraw an amount from their RRIF (and to pay tax on that amount) each year. That minimum withdrawal amount is a percentage of the outstanding balance, with that percentage figure determined by the taxpayer’s age at the beginning of the year. For RRIF holders who are 71 at the start of the year, the required withdrawal percentage is 5.28% – and it increases in each subsequent year. While the taxpayer can always withdraw more in a year (and pay tax on that withdrawal), they cannot withdraw less than the minimum required withdrawal for their age group.
Where a taxpayer holds savings in a RRIF, they can invest those funds in the same investment vehicles that were used while the funds were held in an RRSP. And, as with an RRSP, investment income earned by funds held inside a RRIF are not taxed as they are earned. While the ability to continue holding investments that can grow on a tax-sheltered basis provides the taxpayer with a lot of flexibility, that flexibility has a price in the form of investment risk. As is the case with all investments, investments held within a RRIF can increase in value – or decrease – and the taxpayer carries the entire investment risk. When things go the way every investor wants them to, investment income is earned while the taxpayer’s underlying capital is maintained, but that result is never guaranteed.
On the death of a RRIF annuitant, any funds remaining in the RRIF can be transferred to a RRIF of the surviving spouse without payment of tax. Where there is no surviving spouse, the balance of funds in the RRIF will be treated, for tax purposes, as income to the RRIF annuitant in the year of death, and must be reported as income on the tax return for that year.
While the above discussion of RRIFs versus annuities focuses on the benefits and downsides of each, it’s not necessary, and in many cases not advisable, to limit the options to an either/or choice. It is possible to structure a retirement income plan to provide, to some extent, for both the seemingly irreconcilable goals of lifetime income security and capital (and estate) growth. Combining the two alternatives – annuity and RRIF – either now or in the future can go a long way toward satisfying both objectives.
For everyone, whether in retirement or not, spending is a combination of non-discretionary and discretionary items. The first category is made up mostly of expenditures for income tax, housing (whether rent or the costs of owing a house – even where the mortgage has been paid off, costs like property taxes and utilities must still be paid), food, insurance costs, and (especially for older Canadians) the cost of out-of-pocket medical expenses. The second category, that of discretionary expenses, includes entertainment, travel, and the cost of any hobbies or interests pursued. A strategy which utilizes a portion of RRSP savings to create a secure lifelong income stream to cover non-discretionary costs can help to remove the worry of outliving one’s money, while the balance of savings can be invested for growth and to provide the income to be used for non-discretionary spending.
Such a secure income stream to cover non-discretionary expenses can, of course, be created by the purchase of an annuity. As well, although most taxpayers don’t think of them in that way, the Canada Pension Plan and Old Age Security program have many of the attributes of an annuity, with the added benefit that both are indexed to inflation. By age 71, all taxpayers who are eligible for CPP and OAS will have begun receiving those monthly benefits. Consequently, in making the RRIF/annuity decision at that age, taxpayers should include in their calculations the extent to which CPP and OAS benefits will pay for their non-discretionary living costs.
As of July 2026, the maximum OAS benefit for most Canadians (specifically, those who have lived in Canada for at least 40 years after the age of 18) is about $752 ($827 for those aged 75 and older) per month. The amount of CPP benefits receivable by the taxpayer will vary depending on their work and contribution history, but for 2026, the maximum CPP retirement benefit which can be received at age 65 is $1,508. As a result, a single taxpayer who receives maximum CPP and OAS benefits at age 65 will have $27,120 in annual income ($2,260 per month). And, for a married couple, of course, the total annual income received from CPP and OAS can be about $54,240 annually, or $4,520 per month. While $27,000 a year isn’t usually enough to provide a comfortable retirement, for those who go into retirement in reasonable financial shape – meaning, generally, without any debt – it can go a long way toward meeting non-discretionary living costs. In other words, most Canadians who are facing the annuity versus RRIF decision already have a source of income which is both guaranteed for their lifetime and is indexed to inflation. Taxpayers who are considering the purchase of an annuity to create the income stream required to cover non-discretionary expenses should first determine how much of those expenses can already be met by the combination of their (and their spouse’s) CPP and OAS benefits. The amount of any needed annuity purchase can then be set to cover off any shortfall.
While the options available to a taxpayer at age 71 with respect to the structuring of future retirement income are relatively straightforward, the number of factors to be considered in assessing those options and making that decision are not. All of that makes for a situation in which getting independent professional financial advice on the right mix of choices and investments is a very good strategy.