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Retirement Basics: Understanding How RRIFs Work

Retirement Basics: Understanding How RRIFs Work

It’s no secret that saving for retirement is one of the most important things you can do to secure your financial future. While there are a number of paths Canadians can take, RRSPs remain one of the best ways to build retirement savings. But what happens to your RRSP after you retire, and how do you draw income in a way that is tax-efficient?

To best answer those questions, it’s crucial that you have an understanding of how Registered Retirement Income Funds (RRIFs) work, and how they differ from RRSPs. In this article, I’ll cover everything you need to know about RRIFs and share some tips to help you make the most of this important source of retirement income.

What Is a Registered Retirement Income Fund?

A surprising number of Canadians don’t realize that you can’t hold onto your RRSP account forever. In fact, you must close out your RRSP by the end of the year in which you turn 71. At that point, your option is to either withdraw the balance of your RRSP in full (not recommended), or convert the funds into an annuity, or an RRIF. For the purpose of this article, we’ll focus on the latter.

RRIFs, like RRSPs, are not investments in and of themselves, but a tax-sheltered umbrella, inside of which you can invest your savings a number of ways. Like RRSPs, you control how the underlying funds in the RRIF are invested, be it stocks, bonds, mutual funds, ETFs, GICs, etc. This element of control is one of the reasons that the RRIFs are a preferred method of RRSP conversion.

While RRSPs are designed to accumulate savings over the course of your lifetime, RRIFs are designed to pay you income throughout your retirement years. To better understand how they do this, let’s take a closer look at how RRIF withdrawals work.

RRIF Fast Facts

  • All RRIF withdrawals are subject to income tax
  • You can base your annual minimum payments on your spouse’s age
  • RRIFs can be transferred between different financial institutions
  • The annual minimum payment percentage increases each year
  • RRSPs must be converted to an RRIF by the year in which you turn 71
  • You can convert funds to an RRIF as early as age 55.
  • You can invest money in an RRIF any number of ways
  • By naming a beneficiary, funds in your RRIF are not included in your estate

Understanding How RRIF Withdrawals Work

Because the purpose of an RRIF is to pay you a retirement income, you must withdraw a portion of your overall account balance each calendar year. The minimum withdrawal amount is calculated as a percentage of your plan’s total value at the beginning of the year. The percentage is also based upon your age. In other words, the younger you are, the lower the minimum withdrawal amount.

For example, if you are currently 72 years old, your minimum withdrawal amount this year would be 5.40% of your overall account balance. In other words, if the overall balance of your RRIF at the beginning of the year was $150,000, you would be required to withdraw $8,100. The following year, the percentage would increase to 5.53%.

It’s important to note that your minimum withdrawal amount is NOT subject to withholding tax, but it must be included as income for the year in which it was withdrawn when you are filing your taxes. This is important to note, as you may be required to pay income tax on this amount, depending on your situation. Over and above the annual minimum withdrawal, the financial institution holding your RRIF is required to collect withholding tax, at the time you make an RRIF withdrawal.

Withholding Tax Rates

If you are withdrawing more than the annual minimum from your RRIF, you will be subject to withholding tax, taken at source. Here are the withholding tax rates for anyone living outside of Quebec.

Withdrawal Amount Withholding Tax (%)

Up to $5,000                      10%

$5,001 to $15,000             20%

Over $15,000                      30%

Even though your financial institution has collected withholding tax on your behalf, you are still required to claim the amount withdrawn as income come tax time. Depending on your overall situation, and your marginal tax rate, you may be required to pay even more tax, or, you could receive some or all of it back in the form of a refund. It all depends on your situation. I’ve included a few tips further down that may help to minimize the amount of tax you pay on RRIF income.

When Can I Set Up an RRIF?

As I mentioned earlier, you must convert your RRSP to an RRIF by the end of the year in which you turn 71. However, if it makes sense to do so, you can convert to an RRIF as early as age 55. Keep in mind, however, you would be required to begin withdrawing the annual minimum amount at that time. Currently, the annual withdrawal percentage at age 55 is 2.86%. On the opposite end, if you make it to age 95, and still have any RRIF funds remaining, your minimum annual withdrawal will have risen to 20%.

You may be wondering why someone would want to convert to an RRIF at such an early age? It could be advantageous to someone who is retiring early, and requires income from their RRIF. Or, you could be anticipating other, significant income sources later in retirement, like a workplace pension, that would place you in a higher tax bracket. Thus, it may make sense to begin to deplete your RRIF earlier, in order to lessen the tax burden later on. Just because you withdraw money from your RRIF, doesn’t mean you have to spend it. The funds could be moved into another investment vehicle, such as a TFSA.

How Can I Invest My RRIF Money?

As I mentioned earlier, an RRIF is not an actual investment, it’s a tax shelter. That means that the money inside your RRIF can be invested in any number of ways. That’s right, you can invest your RRIFs in GICs, stocks or bonds, even mutual funds and ETFs. You can even open a self-directed RIF account through a discount broker like Questrade, or with a robo-advisor, such as Wealthsimple, for example. The options are endless.

RRIF vs LIF

You may have heard of the term LIF, or Life Income Fund, and be wondering how it’s different from an RRIF. LIFs are like a counterpart to a RIF, but for locked in retirement plans. An LIF is used to manage funds that originated from an employer pension plan. Because the funds in a LIF are ‘locked in’, there is a maximum amount that can be withdrawn each year, as well as a minimum. Otherwise, they work very much like RRIFs. They are designed to pay out income, and amounts withdrawn are taxable. This article has more information on locked-In plans, including LIFs.

RRIF Tips

The way in which Canadians utilize RRIFs in retirement will vary because everyone’s situation is different. That said, here are a few tips you’ll want to consider, to get the best results from this government registered retirement plan.

  • If your spouse is younger than you, you can base your annual minimum withdrawals on their age. This way, you can reduce the amount of income you’re required to withdraw each year, resulting in potential tax savings.
  • RRIF withdrawals can be set to a variety of frequencies; weekly, bi-weekly, monthly, quarterly, and annually. Check with your financial institution to make sure your payments are set up in a way that works for you.
  • You can transfer your RRIF from one financial institution to another. This may require selling the underlying investments, or paying transfer fees, but you won’t incur income tax providing that you follow the proper procedures. See your financial institution for details on how to make a transfer.
  • If you are married, you should consider naming your spouse as your ‘successor annuitant’ for your RRIF. This way, the funds inside your RRIF would be transferred into their name upon your passing, and payments could continue as is, avoiding any estate taxes or complications.
  • Invest the right way. Many people defer to safety investments for their RRIF, thinking that because they are in retirement, that they can’t handle any risk in their portfolio. The problem with this approach is that people are living longer now than ever, and income from your RRIF may be required for 20 or more years. Of course, you should always consult with an investment professional
  • Income from your RRIF could impact other benefits. For example, the amount of Old Age Security, or OAS, you receive, is determined by your overall income. By pulling too much income from your RRIF, your OAS benefits may be negatively impacted. This is just one reason why you should plan in advance how to best draw RRIF income in retirement.

RRIF Summary

There are many factors to consider when preparing to convert your RRSP to an RRIF. While this article covers many important RRIF topics, you should always consult a professional for advice. How you manage your RRIF will depend on your marital status, age at retirement, as well as your other retirement income sources, such as an employer pension, government benefits, or even an anticipated inheritance. All of these are factors that should be taken into account. Last, but not least, is how best to invest the funds inside your RRIF. With so much to consider, my hope is that you now have a solid foundation from which to start.

Comments

  1. Alex

    I have a question: What is the EARLIEST age you can open an RRIF? What if you want to retire at 55?

    • Richard

      You can open up a RRIF at any age. If you have 2 RRSP’s you can change 1 to a RRIF and withdraw the minimum from 1 only. This keeps the minimum withdrawals lower. Also any good RRIF has no withdrawal fees while an RRSP may, so don’t pay banking withdrawal fees on an RRSP, withdraw from your RRIF.

  2. Jim Yih

    Alex, you can convert RRSP to RRIF at any age as long as it is before the end of the year in which you turn 71. You could convert in your 20’s, 30’s or 40’s but unlikely that one would do so. Many have converted RRSPs to RIFF in their 50’s.

    • Richard

      Don’t forget you only live so long and minimum tax rates are about $42,707 per year in Ontario. Divide by the number of years you expect and withdraw lower than the minimum. You’d be paying 14.5%, higher than that you pay 30.5% and higher.
      It also makes you wonder why you let the banks convince you to contribute when your tax rates were minimum. You may be withdrawing at maximum tax rates after retirement if you pensions are too good.
      If you had a good job the best time to contribute was when your income was the highest.
      You wait too long to withdraw and your income will be too large to stay at lower tax rates.
      Retiree with experience

  3. Steve Zussino

    This is an interesting idea. Can I collect a canadian pension at 55?

    How can I calculate what kind of pension I will have at certain ages?

  4. luc

    Thinking of retiring at 57 with my wife being 56…We`ll have approx.$400,000 in rrsp`s…We`ll have about $100,000 each in tfsa when we turn 65…No pensions or other income…We plan on using up all our rrsp`s before 65…So any overage we cash out will go to top up the tfsa and cash for later use…Once 65,we should be receiving oas,cpp,and gis since we`ll have no other income…Those 3 together will get us approx. $3000 net per month between the two of us..We can then supplement our income with cash and tfsa`s…Best way to get max from the man and retire early …I`m not a pro so any advise will be appreciated…Thanks

  5. Ron L

    First question: What is the earliest age you can withdraw from a RRIF? I’ve seen websites that say 55, but then the CRA website did not say that. I am puzzling.

    Second question: Can I convert a locked-in RRSP into a RRIF and start making withdrawals?

    Thanks…
    Ron L
    Markham, Ontario.

  6. marlene willette

    my boy friend phoned family food bank. he thought he had just a rrsp in this credit union. they got back to him fri oct 17th 2012 an told him he could not get access to his fund.they told him it is locked in, that he has to go through the government to get this money. could you please explain this tome. there is only 8000.00 in the plan, he is also over 55. any help would useful,

    • Richard

      That amount is small enough that it can be transferred to a RRIF from a locked-in account and then withdrawn. Check with your bank.
      My wife did it with just over $10,000. We found the rules on the web, printed it and took it to our bank.

  7. Miriam De Angelis

    If you convert to a RRIF early, can you convert back to an RRSP? If yes, are there any tax implications?

  8. Asset Based Loans

    Yes it’s true retirement is a an vital part of securing a financial future and it’s tax shelter plan that you can advantage from in your retirement.

  9. My Own Advisor

    I like Luc’s idea and have long considered doing something similar with my RRSP in my 50s:

    -Retiring in 50s,
    -Use some RRSPs to convert to RRIF
    -Live off of RRIF
    -Keep rest of RRSP growing until I must collapse it or need the money.

    Once 67, will take OAS. May take CPP at 60 or 65, not sure.

    Use any money not needed from RRIF to fund TFSA, grow TFSA and live from dividend income it will produce.

    Good article,
    Mark

  10. Percy Gamboa

    How much tax is taken by coverting rsp to rif?

  11. Linda mclean

    My husband is turning 71 this summer. He has rrsp,s in different financial institutions. Can we transfer each rrsp into an rrif at each institution and them take minimum amount out of the plan we choose. He has them coming due in different years and also some as stock.

  12. Mike Walsh

    If I establish my RRIF at, say, the age of 55, will I not be subject to any minimum withholding amounts until I reach the age of 65? (The charts all seem to start at age 65). Or am I subject to them and just manually do the calculation: 1/(90 – 55) = 2.86% for the first year?

  13. Barb

    I turn 71 on December 31. How is the end of the year that I turn 71 calculated. Does my year end on thecsamevsay I turn 71?

    Looking forward to your answer

  14. Krystal

    My brother and I just received money from my mother’s RRIF upon her death. How much money in income tax can I expect to pay?

  15. Bob Lin

    Some extra RIFF info (Tom, please correct me if I have it wrong): A few additional benefits of converting RRSPs to RIFFs:

    1. At age 65 pension income from.a RIFF can be split with your spouse/partner when reported on your tax return, to balance your incomes and potentially reduce the taxes to be paid and minimize clawbacks of OAS. You cannot split income from RRSPs.

    2. At age 65 or older the pension income tax credit can be applied against income from a RIFF but not against income from an RRSP..

    3. In some provinces (Manitoba for sure) there is a Pension Amount tax credit that works similar to the pension income tax credit credit. It can be applied against RIFF income, after age 65, but it not be applied against income from an RRSP.

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