A Registered Retirement Income Fund (RRIF) is a tax-deferred retirement plan and an essential part of your Registered Retirement Savings Plan (RRSP). These accounts work in tandem to allow you to build tax-sheltered retirement savings during your working years and have an income stream during your retirement.
Once you retire, you transfer your retirement savings from your RRSP to your RRIF. From there, according to calculations determined by the federal government, you will receive annual payments based on a percentage, determined by your age or that of your spouse, your years of retirement and the value of your RRIF as a whole. Like an RRSP, a RRIF is registered with the federal government and is considered a federal product.
How does a RRIF work?
According to federal law, an RRSP must be converted into a RRIF. Although Canadians can convert their RRSPs to RRIFs at any time upon retirement, it is mandatory that RRSPs be converted no later than December 31 of the year the owner turns 71.
If the owner does not convert, the money in the RRSP will be listed as income on your taxes and you may have to pay taxes on the full amount in the account. If you have a large sum of money in there, it could mean a hefty tax bill. Thus, by having a RRIF and accepting predetermined annual payments, you pay less tax, depending on your annual income and your marginal tax rates.
Converting an RRSP to a RRIF is easy, let your financial institution know you want to convert or they will let you know.
Funding your RRIF can be done in different ways. You can transfer money from your RRSP, but you can also fund it from your:
- Pooled Registered Pension Plan (PRPP)
- Deferred Profit Sharing Plan (DPSP) offered by your employer
- RRSP or RRIF of spouse or spouse, upon separation or if deceased
- Spouse’s or partner’s DPSP if deceased
- Another RRIF
While a RRIF is primarily a means of delivering proceeds from your RRSP and other sources of retirement savings, it is still an investment vehicle. That said, a RRIF can hold investments such as:
- AND F
- Mutual fund
- Segregated funds
These investments continue to grow tax-free while in the RRIF, so retirees will have enough money for their lifetime.
What is the difference between a RRIF and an RRSP?
An RRSP is used to save and invest your money for retirement, while a RRIF allows you to withdraw those savings and investments when you retire (or by the end of the year you turn 71 ). Simply put, an RRSP is used to build your savings and a RRIF is used to distribute them.
With an RRSP, your savings grow tax-free and you benefit from an annual tax deduction based on your contributions. However, with a RRIF, you can no longer contribute, but your money and assets remain tax-sheltered until you withdraw them.
There is no maximum withdrawal amount. However, keep in mind that not only will you have to pay tax on the minimum withdrawal amount, but you will also have to pay withholding tax on any excess amount. Your financial institution will take the amount and pay it to the government.
Withholding tax rate
|Amount above the minimum amount||Withholding tax rate (except in Quebec)|
|Up to $5,000||ten%|
|Between $5,000 and $15,000||20%|
What are the benefits of a RRIF?
The most obvious is the tax sheltering of your investments, but there are other benefits.
- All of your investments continue to grow in your RRIF after you transfer them from your RRSP. You only pay taxes on what you withdraw each year. If you take your entire RRSP investment in one lump sum upon withdrawal, you may end up paying a lot of tax on that amount, as you may be subject to a higher marginal tax rate. For example, let’s say you are 71 and still working. If you decide to take this lump sum, you will be subject to a higher tax rate because you have income. If you are retired, your marginal tax rate will be based on your RRIF minimum withdrawals, which should be lower.
- It provides you with a steady stream of income, as you can make annual, semi-annual, quarterly or monthly withdrawals, depending on how you want to manage your cash flow.
- Your RRIF income entitles you to a maximum of $2,000 for the pension income credit.
If you have a spouse or partner, there are also additional benefits:
- You can use your spouse’s age to calculate the minimum amount that will come out of your RRIF. This is important because, if your spouse is younger than you, it means a lower minimum amount, which means less tax paid on withdrawals.
- You can split income with your spouse because your RRIF income is considered pension income.
- You can leave your RRIF to your spouse tax-free. Also, since registered accounts are not considered part of your estate, they will not be affected by probate fees.
What is the difference between a RRIF and an annuity?
Let’s first define a RRIF and an annuity. A RRIF is a retirement fund that holds investments and money, while an annuity is an insurance policy that guarantees the payment of a fixed amount annually over an agreed period of time.
These are two different products that have the same objective: to provide you with a regular income during your retirement. However, each has its own advantages and disadvantages.
One of the main advantages of a RRIF is that it can hold investments, but one of its disadvantages is that it is subject to market conditions, depending on the risk of your portfolio. On the other hand, an annuity provides guaranteed income, but you have little control over it. You have to pay tax on both products.
However, since the products are different, there’s no reason why you can’t have both a RRIF and an annuity. You can consider putting part of your RRSP into a RRIF and using the rest to purchase an annuity.
What is the minimum withdrawal limit for a RRIF?
As mentioned, the minimum amount retirees must withdraw annually is a percentage based on age, combined with the value of your RRIF. These minimums are set by the federal government and the amount increases as you get older. The calculations are made up to the age of 95.
They were updated in the 2015 federal budget to allow Canadians to keep more money in their RRIF, which could continue to grow tax-free. Doing the math to age 95 and beyond is also an acknowledgment that people are living longer, to age 80 on average, and need their money to last.
The current formula is 1/(90- your age on January 1 of the current year). Other factors that make up the calculations include an assumption of a nominal rate of return of 5% and indexation of 2% based on long-term historical rates of return on an investment portfolio and historical expected inflation. The minimums have been reduced as shown in the table below.
Minimum amounts to withdraw from a RRIF:
|Age (at the beginning of the year)||Existing factor up to 2014%||New factor from 2015 %|
|95 years and over. This percentage is fixed until you use all of your RRSP||20.00||20.00|
Although these are fixed amounts, exceptions have occurred. In 2020, the federal government temporarily reduced the minimum annual withdrawal by 25% due to the pandemic, which was causing turmoil in the markets.
A RRIF is an option to provide income during your golden years, if it suits your financial situation. As with any financial product, make sure you can take advantage of the benefits so you have enough money to ensure a comfortable retirement.