A Registered Retirement Income Fund (RRIF) is like an RRSP’s responsible older sibling. Once you hit retirement, the RRIF takes over where the RRSP leaves off – turning your savings into retirement income.
Indeed, if RRSPs are the workhorse of your savings years, RRIFs are your retirement MVP. They take all that tax-deferred money you’ve been squirreling away and turn it into an income stream for your golden years.
But RRIFs aren’t just about taking the money and running; they’re about strategy, timing, and (hopefully) avoiding big mistakes. Let’s dive into everything you need to know to master the RRIF game.
So, buckle up for the most comprehensive RRIF guide you’ve ever read (this can be true if you’ve never read one before, stay with me).
Let’s dive into everything you need to know – from opening a RRIF to what happens when you kick the bucket (yes, we’re going there).
What is a RRIF?
Think of a RRIF as an extension of your RRSP – just with some rules about withdrawals.
While your RRSP is all about accumulating savings, your RRIF is where you start spending that money.
Here’s the kicker: your RRIF continues to grow tax-deferred, but the government requires you to withdraw a minimum amount every year.
Key RRIF Rules at a Glance:
By the end of the year you turn 71, you must convert your RRSP into a RRIF, purchase an annuity, or withdraw the funds as a lump sum. Many opt for a RRIF due to its flexibility and continued tax-deferred growth.
You can open a RRIF earlier if desired. Once established, contributions are not permitted, but you can hold multiple RRIFs and manage them similarly to self-directed RRSPs.
- You must convert your RRSP to a RRIF by the end of the year you turn 71.
- Minimum withdrawals begin the year after you set up the RRIF.
- Contributions are not allowed (your RRSP days are over).
Simple enough, right? But this is just the beginning.
When Can You Open a RRIF?
Here’s a fun fact: you can open a RRIF at any age. There’s no rule saying you have to wait until 71—or even 55, as the internet often claims.
Early retirees or anyone looking for tax strategies might want to open a RRIF earlier for several reasons:
- Income smoothing: If you retire in your 50s, withdrawing from a RRIF in small amounts can help keep your taxable income lower over time.
- Pension income tax credit: Starting at age 65, you can claim this credit on the first $2,000 of RRIF withdrawals.
- Flexibility: A RRIF gives you predictable income while letting the rest of your investments grow tax-deferred.
How Are RRIF Minimum Withdrawals Calculated?
Starting the year after you open a RRIF, you must withdraw a minimum amount annually.
The formula is:
Minimum Withdrawal = Fair Market Value × [1 ÷ (90 – age)]
Translation: The percentage you’re required to withdraw increases as you age. For example, at age 65, your minimum withdrawal is 4%, but by 80, it’s 6.82%, and at 95, it’s a whopping 20%!
Here’s a handy chart:
| Age | Withdrawal % |
|---|---|
| 50 | 2.50% |
| 55 | 2.86% |
| 60 | 3.33% |
| 65 | 4.00% |
| 70 | 5.00% |
| 75 | 5.82% |
| 80 | 6.82% |
| 85 | 8.51% |
| 90 | 11.92% |
| 95 | 20.00% |
Pro Tip: Base your withdrawals on a younger spouse’s age if you want to keep the percentages lower.
Why the increasing percentages?
The government designed these rules to ensure RRIF funds don’t sit untouched indefinitely. After all, tax-deferred savings were meant for retirement spending – not hoarding for the next generation (the CRA is not a fan of that idea).
Tax Implications
Withdrawals from a RRIF are considered taxable income. While the minimum RRIF withdrawal isn’t subject to withholding tax, any amount exceeding this minimum will have withholding tax applied.
It’s crucial to account for these withdrawals in your annual tax planning to avoid unexpected liabilities.
Investment Options Within a RRIF
It’s important to note that you can hold the exact same investment portfolio inside your RRIF as you held inside your RRSP. Think of it as simply a different container with different rules, but the contents inside that container can remain the same.
RRIFs can hold a variety of investments, including:
- Cash
- Guaranteed Investment Certificates (GICs)
- Bonds
- Mutual funds
- Exchange-traded funds (ETFs)
- Individual stocks
This diversity allows you to tailor your investment strategy to your retirement income needs and risk tolerance. DIY investors can consider my easy two-fund solution for investing in retirement.
Strategies for RRIF Withdrawals
1). Melt Down Your RRSP/RRIF Early
Consider withdrawing aggressively in your 60s to delay taking CPP and OAS. Why? Because waiting until 70 to claim CPP means up to 42% more income, guaranteed for life.
2). Maximize the Pension Income Tax Credit
If you’re 65 or older, the first $2,000 of RRIF withdrawals qualifies for a tax credit—easy money in your pocket.
3). Pension Income Splitting
Got a partner? RRIF withdrawals at 65 and older qualify as eligible pension income, which means you can split up to 50% with your spouse to reduce your overall tax bill.
4). Minimize Estate Taxes
Large RRIFs left untouched can become a tax nightmare for your beneficiaries. By withdrawing earlier, you can reduce the size of your estate and the CRA’s cut.
Melting Down a RRIF Early for Bigger CPP and OAS Benefits
Here’s the deal: the longer you delay taking CPP and OAS, the bigger your monthly cheques. (I’m talking up to 42% more CPP if you wait until 70.)
To make this delay work, some retirees choose to “melt down” their RRIF early – making aggressive withdrawals in their 60s to bridge the income gap.
The strategy has its perks:
Higher government benefits: CPP and OAS are inflation-adjusted and guaranteed for life – benefits no investment portfolio can match.
Lower (or smoother) lifetime taxes: By draining your RRIF more significantly in early retirement, you could reduce your taxable estate later and avoid higher tax brackets (and potential OAS clawbacks) as mandatory withdrawals ramp up.
The downside? You’ll pay more taxes on withdrawals now. But if you’ve done your math (or hired a pro), the long-term benefits often outweigh the short-term sting.
Pension Income Splitting: A Tax-Saving Power Move
If you’re 65 or older, RRIF withdrawals qualify as pension income for tax purposes. That means you can split up to 50% of your RRIF income with your partner, potentially saving thousands in taxes if one of you is in a lower tax bracket.
For example, say you’re withdrawing $40,000 a year from your RRIF, but your spouse only has $10,000 in taxable income.
No money actually changes hands, but when you file your tax returns the higher income spouse can elect to transfer $15,000 of their RRIF income to the lower income spouse so they each have taxable income of $25,000.
By splitting the RRIF income, you reduce your overall household tax bill.
RRIF vs. RRSP Withdrawals
If you’re still holding onto your RRSP, you might wonder, “Why not just withdraw from it instead?”
Good question! Here’s the difference:
Withholding Tax: RRSP withdrawals face withholding tax of up to 30% (depending on the amount withdrawn), while RRIF withdrawals only count as taxable income, without immediate withholding for amounts at or below the minimum.
Partial Deregistration Fees: Many financial institutions charge a fee – often $35 to $50 – for each withdrawal directly from an RRSP. These partial deregistration fees can add up quickly if you’re making frequent withdrawals. RRIFs, on the other hand, typically don’t have these fees, especially if withdrawals are set up as scheduled payments.
Regular Income: We know retirees have a hard time spending their money. RRIFs are designed to provide predictable income, with minimum withdrawal amounts calculated annually. This makes them ideal for retirees looking for a steady cash flow.
Flexibility: While RRIFs impose minimum withdrawals, you can always withdraw more if needed (though additional amounts are subject to withholding tax). RRSPs, in contrast, allow total flexibility but at a potential administrative cost (see those pesky fees above).
Pro Tip: If you plan to make several withdrawals, converting your RRSP to a RRIF could save you from partial deregistration fees, while also setting you up for a tax-efficient retirement income strategy.
What Happens to a RRIF When You Die?
Estate planning isn’t fun, but it’s essential. If you die with a RRIF:
With a spouse: The RRIF rolls over tax-free to your spouse, who continues the withdrawals.
Without a spouse: The entire RRIF balance is taxed in the year of your death, often at the highest marginal rate. Your beneficiaries will receive what’s left after taxes, but depending on the size of your RRIF, that could be a big hit.
Make sure to designate beneficiaries on your RRIF account and consider strategies like charitable giving or early withdrawals to reduce the size of your RRIF balance and, ultimately, the CRA’s bite out of your final estate.
RRIF Pitfalls to Avoid
Even the savviest retirees make mistakes. Here are the big ones to avoid:
1). Withdrawing too much, too soon: Nothing says “oops” like running out of money in your 80s.
2). Forgetting about taxes: Every dollar withdrawn is taxable, so plan ahead.
3). Converting an RRSP to a RRIF incorrectly: Believe it or not, some people accidentally withdraw their entire RRSP while trying to convert it to a RRIF. Yes, this has really happened, and yes, the CRA will happily take their cut. Don’t be that person – get professional advice.
Final Thoughts
A RRIF isn’t just about following government rules; it’s about using those rules to your advantage. By understanding the ins and outs of RRIFs, you can maximize your retirement income, minimize taxes, and avoid common mistakes.
Whether you’re an early retiree strategizing withdrawals or just trying to figure out what happens to your RRIF after you’re gone, the key is to plan ahead.
And hey, if you’re not sure where to start, an advice-only financial planner can help you nail down a strategy – no hidden agendas, no sales pitch, just smart advice tailored to your goals.
Here’s to a retirement that’s as smooth (and predictable) as your RRIF withdrawals!
