What is a RRIF?

You worked hard to build your Registered Retirement Savings Plan (RRSP) throughout your career. So, once you punch the clock for the last time, make sure you can turn your retirement savings into a retirement income that meets your needs. One of the most popular ways is to convert them into a Registered Retirement Income Fund (RRIF). This article explains how RRIF accounts can make your retirement planning easy.

What is a RRIF?

Think of a RRIF as a natural continuation of your RRSP. The primary difference is that you contribute to an RRSP, but you withdraw from a RRIF. And, like RRSPs, RRIFs provide tax-sheltered growth, and your withdrawals are taxable. You will owe income tax only on the money you take out.

What are the rules for converting your RRSP to a RRIF?

As with many aspects of investing and finance, the best time to convert your RRSP to a RRIF depends on your specific situation. You can transfer your RRSP savings to a RRIF at any time, but no later than December 31 of the year you turn 71. In most circumstances, it makes better financial sense to open a RRIF once you are no longer working or contributing to an RRSP, and when you are looking to draw a retirement income from your savings.

Keep in mind that once your funds are transferred, and while the RRIF account is active, you can no longer make contributions to that policy. If you still have an RRSP, however, you can continue to contribute to that account.

How does a RRIF work?

Canadian tax rules mandate that you can’t own an RRSP after the end of the year you turn 71. That means you must take your retirement savings out of your RRSP, either in cash all at once (and face a large tax bill) or a little at a time through regular withdrawals. For the latter option, you have to transfer your savings to a specific retirement account – like a RRIF or an annuity – and withdraw the funds in increments. Making smaller withdrawals over time, as you need them, means paying less income tax overall.

If you choose to transfer your savings into a RRIF account, these funds can continue to grow, tax-sheltered. Or, if you wish to keep your retirement savings invested, a RRIF provides multiple options, such as mutual funds, segregated funds, GICs, stocks and more, to enable continued growth. You will need different RRIF accounts to invest your savings in different ways (for example, segregated fund and mutual fund investments cannot be combined into the same RRIF account).

What are the RRIF withdrawal rules?

Beginning the year after you set up your RRIF, the government requires that you withdraw a minimum amount of your account annually. At age 65, that minimum amount is 4% of the account’s value on December 31 of the previous year. The percentage rises every year, topping out at 20% for those aged 95 and older.

As an example, if your RRIF is valued at $500,000 when you’re 71, the minimum withdrawal amount of 5.28% means that you’ll take out at least $26,400 that year. The following table shows the minimum withdrawal amount for ages 65 and up:

If your spouse is younger, you have the option of using their age to calculate your minimum RRIF withdrawal. By delaying your withdrawals in this way, you can keep them in a tax-sheltered environment even longer.

There is no maximum RRIF withdrawal amount. But keep in mind that the more you take out in any given year, the more income tax you’ll pay that year.

Are you on track to meet your retirement goals?

This Retirement Income Calculator can help you get a better understanding of how long your savings will last.

What are RRIF withdrawal strategies?

You won’t find a single RRIF withdrawal strategy that works for every scenario. For how much you should take out each year, ask yourself these questions:

• How much retirement income do I need? If your other sources of retirement income, like CPP and OAS, can sustain the lifestyle you want, it may be beneficial to only withdraw the minimum from your RRIF each year. This will reduce your tax bill.
• How old is my spouse? If you and your partner are different ages, withdrawing from your RRIF using the younger spouse’s age allows you to take less out and keep more in the account to grow.
• Do I have unused TFSA room? There can be advantages to withdrawing more than the minimum from your RRIF. Though you’ll pay more tax, you may be able to generate investment returns that outweigh the tax penalty by putting the funds in other investment accounts, like a Tax-Free Savings Account. Not only will your funds be more accessible, but you’ll decrease future taxes on your estate. While RRIFs are fully taxable upon death, no tax will be owed on your TFSA when you die.
• Do I have a LIF? Since withdrawals from a LIF have a maximum annual limit, it can be difficult to use your LIF funds exactly as you want. In this case, a beneficial strategy may be to withdraw the maximum amount from your LIF, while keeping your RRIF withdrawals to a minimum. This can improve your flexibility over time by exhausting the more restrictive account first.

These are just some of the factors to consider when determining how a RRIF fits into your retirement planning strategy. For personalized advice, contact a knowledgeable Co-operators financial representative.

Now that you know more about RRIFs, is it the retirement account for you?