Saving for retirement: Registered Retirement Income Funds (RRIFs)
Saving for retirement is top of mind for many Canadians. Registered Retirement Savings Plans (RRSPs) have long been a popular choice for growing retirement savings on a tax-deferred basis. But the actual mechanics of withdrawing funds in retirement is a bit more complicated than most people realize and may involve setting up a RRIF. Here's an overview of what you need to know about RRIFs.
What is a RRIF?
RRIFs are tax-deferred retirement accounts that pay you income throughout your retirement years. They allow for a variety of investment choices, including stocks, bonds, mutual funds, and ETFs. With RRIFs, there is a minimum annual withdrawal requirement based on your age or your spouse’s age. They are formed by transferring funds from a registered plan, such as a RRSP.
As RRSPs cannot remain open indefinitely, by the end of the year you turn 71, it's time to make a decision: withdraw the balance, convert the funds into an annuity, or transfer your RRSP into a RRIF. The latter is the most common, enabling continued tax deferral benefits.
When and how do you convert an RRSP to a RRIF?
The conversion of an RRSP to a RRIF must occur by the end of the year you turn 71. Although you can make this conversion as early as age 55, it's crucial to remember that once converted, you must begin withdrawing the annual minimum. When contemplating conversion, consider your retirement income sources, potential tax bracket, and whether RRIF income is necessary.
How do RRIFs work?
You must withdraw a minimum amount from your RRIF starting the year after the account is opened. The minimum withdrawal is calculated as a percentage of your plan's total value at the previous year's end, relative to your age. This percentage increases with your age. If your spouse is younger, you can make a one-time election1 to have the payment based on your spouse’s age2. These withdrawals are taxable income. For instance, if you are 72 years old and your RRIF balance at the previous year's end was $200,000, you would need to withdraw 5.40% of the plan, equating to $10,800.
While there is no cap on withdrawal amounts, any withdrawals over the minimum will incur withholding tax at source3. For withdrawals exceeding the minimum, such as for a major expense, consider the withholding tax. For example, withdrawing an additional $2,000 over your minimum would require withdrawing approximately $2,222, factoring in the 10% withholding tax. This acts as a prepayment of tax on the excess withdrawn. If the actual tax owed is less than the amount withheld, it will be refunded upon filing your personal tax return.
Remember, RRIF income is taxable, and withdrawals exceeding the minimum may push you into a higher tax bracket, potentially affecting income-tested benefits like Old Age Security (OAS).
What is the minimum withdrawal requirement for a RRIF?
Below is a table illustrating the RRIF minimum payout percentages by age, with annual percentage payouts gradually increasing until age 95.
| Age | RRIF minimum withdrawal % per year |
|---|---|
| 55 | 2.86% |
| 56 | 2.94% |
| 57 | 3.03% |
| 58 | 3.13% |
| 59 | 3.23% |
| 60 | 3.33% |
| 61 | 3.45% |
| 62 | 3.57% |
| 63 | 3.70% |
| 64 | 3.85% |
| 65 | 4.00% |
| 66 | 4.17% |
| 67 | 4.35% |
| 68 | 4.55% |
| 69 | 4.76% |
| 70 | 5.00% |
| 71 | 5.28% |
| 72 | 5.40% |
| 73 | 5.53% |
| 74 | 5.67% |
| 75 | 5.82% |
| 76 | 5.98% |
| 77 | 6.17% |
| 78 | 6.36% |
| 79 | 6.58% |
| 80 | 6.82% |
| 81 | 7.08% |
| 82 | 7.38% |
| 83 | 7.71% |
| 84 | 8.08% |
| 85 | 8.51% |
| 86 | 8.99% |
| 87 | 9.55% |
| 88 | 10.21% |
| 89 | 10.99% |
| 90 | 11.92% |
| 91 | 13.06% |
| 92 | 14.49% |
| 93 | 16.34% |
| 94 | 18.79% |
| 95+ | 20.00% |
How are RRIF withdrawals taxed during your lifetime?
Withdrawals from a RRIF are taxed as regular income. RRSP contributions are tax-deferred, allowing you a tax deduction initially and taxable withdrawals later, ideally when retired and in a lower tax bracket.
You may be eligible to claim the pension income tax credit up to $2,000 if you’re 65 and above and you receive pension income, including RRIF withdrawals.
What happens to your RRIF after you pass?
Upon death, the RRIF value is fully included in your final tax return. Similar to an RRSP, naming a beneficiary on the RRIF account can help avoid probate taxes4. If your spouse or common law partner is the beneficiary, they can transfer the RRIF funds above the RRIF minimum to their own RRSP or RRIF in a tax-deferred rollover. The RRIF minimum is included as income on your final tax return. The spouse will pay tax on the amounts as they are withdrawn from their RRSP or RRIF.
Alternatively, you can name a "successor annuitant," which can be a spouse or common-law partner. This individual takes over the entire account upon your passing and must withdraw a minimum annual amount from the RRIF. Any amounts paid before your death are taxable on your terminal return.
How frequently can you withdraw from a RRIF?
You can choose the frequency of RRIF withdrawals, ranging from weekly to annually. You should speak with your financial advisor to find the best fit for your financial situation and lifestyle needs.
Key Takeaways
When converting your RRSP to a RRIF, consider these factors:
- Your retirement timing and timeline
- Your lifestyle needs in retirement
- Your retirement income sources, including government benefits
- Using your younger spouse’s age for minimum annual withdrawals
For advice tailored to your needs, consult your professional advisors.
1 Once elected, you cannot change this to use your own age.
2 As noted, the earliest you can convert to a RRIF is age 55. If your spouse is below age 55, the minimum withdrawal is calculated as 1/(90-age).
3 For withdrawals up to $5,000: 10% (19% in Quebec). For withdrawals between $5,000 up to $15,000: 20% (24% in Quebec). For withdrawals over $15,000: 30% (29% in Quebec).
4 An estate administration tax based on the FMV of your assets at death.
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