Keys to understanding RRIFs, the natural extension of RRSPs

02 November 2021 by National Bank
A grandfather and his grandson dance in the family garden.

Every year, you see ads encouraging you to contribute to your RRSP. Although RRSPs are well known to the general public, Registered Retirement Income Funds, or RRIFs, are less so. Find out more about this product to help you plan your retirement savings.

What is a RRIF and how does it work?

As its name indicates, a RRIF is a registered fund that provides you with retirement income. There is a minimum amount you have to withdraw from your RRIF each year and everything you take out is taxable. 

Its main advantage is that it allows you to keep some of the tax benefits of RRSPs. When you use a RRIF to hold the money you’ve saved up over the years in plans like RRSPs, you don’t pay tax on that money until you withdraw it. 

Why convert an RRSP to a RRIF?

Did you know that you will no longer be able to contribute to your RRSP after December 31 of the year you turn 71? The government will also make you close your RRSP on that date. Most people choose to transfer the money to a RRIF. 

If you don’t transfer the money to a RRIF by the deadline, all of it will be considered as taxable income in the same year. This could cost you a lot in taxes.

Why? Because when you put money into your RRSP, you deduct that amount from your taxable income to lower your taxes. This allows you to save on taxes during your working life. The money will be taxed when you withdraw it during retirement. 

By transferring your savings to a RRIF, you can continue to benefit from the tax advantages of keeping the capital and income tax-sheltered until you withdraw them. There is a new condition, however: You will have to withdraw an increasing percentage of your savings each year, except in the first year you open a RRIF. These amounts will be added to your taxable income.

Tip: You can only make one deposit into a RRIF, when you open it. The funds usually come from your RRSP, Pooled Registered Pension Plan (PRPP), or Specified Pension Plan (SPP) accounts. Afterwards, you can only take money out of your RRIF!

How to close your RRSP and open a RRIF

You have to go through a financial institution to convert an RRSP to a RRIF and you will have certain formalities to complete such as signing a number of forms. That’s why you should start the process well before the deadline. 

If you are almost 71, your financial institution should contact you to warn you that it’s time to act. It will offer advice and handle the necessary transactions. If you are younger, but want to convert your RRSP to a RRIF, contact your advisor for help.

You may have to go to your branch to sign the forms, although some financial institutions may allow you to use an electronic signature if they’re set up for that.

When should I convert my RRSP to a RRIF?

There is no minimum age for closing an RRSP and transferring the money to a RRIF. 

Are there reasons to convert an RRSP to a RRIF before age 71? 

That depends on your situation. For example, if you decide to take early retirement, you may want to withdraw part of your savings to maintain your lifestyle. Using your RRIF could be an option.

Some people prefer to wait before tapping into other types of retirement income such as Old Age Security, because the payments increase if you delay your application. In the meantime, you can use the savings in your RRSP to fill the gap, but you have to transfer them to a RRIF first.

Tip: You don’t have to transfer the money in your RRSP to a RRIF before withdrawing it. You can withdraw all the money in your RRSP at once and pay the corresponding taxes if you wish. RRIFs are part of a gradual, long-term withdrawal strategy. There are other ways to pay less tax at retirement. Find out how.

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How much should I withdraw from my RRIF each year?

It all depends on your needs. The rules governing RRIFs establish a minimum amount that you have to withdraw, but there’s no maximum.

As you get older, the percentage of your savings that you’re required to withdraw goes up. To see the rate that applies to your situation, check the table on the Canada Revenue Agency website

Ask a retirement expert to estimate how long your RRIF will last based on the required minimum withdrawal amounts and your needs. If your heath and life expectancy are good, you may not have enough money saved in your RRIF. It may be prudent to keep saving after retirement by depositing part of the income in a TFSA, for example.

Can I use my spouse’s age to my advantage?

If your spouse is eligible and younger than you, you can give their age when you open the RRIF, instead of your own age. This is an irrevocable decision, even in the event of death or divorce.

What is the minimum RRIF withdrawal?

However, it allows you to lower your minimum withdrawal. This means your RRIF will last longer and you will have less tax to pay because the amounts you receive will be lower. 

For example, if you are 71 and you give your spouse’s age, say 60, the minimum required withdrawal will be the amount for 60-year-olds. Since the younger you are, the lower the minimum withdrawal amount, this provides a tax benefit for people who don’t need more monthly income. Ask your retirement planner to have a look at this option in light of your needs.

It’s important to distinguish this option from another tax-saving technique, namely income splitting between spouses

Our retirement planning experts are there to help you. 

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How do withdrawals from a RRIF work?

You choose the amount (at least the minimum) and the frequency of your retirement payments from your RRIF. You can receive your payments on a monthly or quarterly basis or once or twice a year. You can change the frequency and the amount at any time.

There is no withholding tax if you withdraw the minimum amount. However, you must declare it as income when you fill out your tax return. Your financial institution will deduct tax at source for withdrawals over the minimum.  

Since there is no minimum withdrawal in the year you open your RRIF, tax will be withheld on all amounts withdrawn in the first 12 months.

Understanding RRIFs is key to retirement planning. It is one of the many tools that will allow you to achieve your retirement goals. Talk to our experts. They can help you use your RRIF effectively. If you have any questions, we’re here to help.

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