We’ve written before about how your RRSP has an expiry date. As soon as you celebrate your 71st birthday, you’ll need to dismantle all your RRSPs before that December 31st. So then what?
Most Canadians won’t want to withdraw the full value of their RRSPs all at once, because they’d be faced with a whopper of an income tax bill. So there’s a financial product designed to be the flipside of an RRSP. It’s called the RRIF: Registered Retirement Income Fund.
How does it work?
With a RRIF, your lifetime of savings is paid out to you regularly, like a paycheque throughout your retirement. Your RRIF account continues to grow tax-free like your RRSP did, and only the amounts paid out to you each year count as taxable income.
By the way, the year you turn 71 is the last year you can roll over RRSPs to RRIFs; you can convert earlier if you want income from this source sooner. Or you can use your younger spouse’s age to delay RRIF withdrawals until your spouse turns 71. If you’re over age 65, withdrawals from your RRIF may qualify for a pension income tax credit, which eliminates or reduces tax on the first $2000 paid out.
Is there a minimum withdrawal amount?
There are minimum annual withdrawal requirements, starting the year after you set up your RRIF. Your minimum withdrawal amount is based on a percentage of your RRIF value (for example 4.0% at age 65; 5.4% at age 72). The percentage increases marginally each year until you turn 94 when the percentage locks in at 20%. This means, for example, that from age 94 onwards, you must withdraw a minimum of 20% of the value of your RRIF year after year after year.
What if I have more than one RRIF?
You can hold more than one RRIF, but you’ll be required to withdraw a minimum from each one of your RRIF accounts. For each RRIF account, you can choose the frequency of your payouts: monthly, quarterly, semi-annually or annually, change your withdrawal amounts or frequency, or make lump sum withdrawals if you need to. Holding a few different RRIFs allows you to create a unique withdrawal schedule that suits your lifestyle in retirement. (And by the way, there is no maximum withdrawal amount – withdraw what you need, remembering that all withdrawals count as taxable income.)
Can I continue to contribute into the RRIF?
You cannot contribute into your RRIF to build it up any further – that’s what all that RRSP saving was for. But your RRIF money can continue to grow tax-free. And it can include the same eligible products as your RRSP did, including cash, GICs, mutual funds, stocks, and bonds. And like RRSPs, your RRIFs can be self-directed or managed by a financial partner. Always ask about any administration or management fees that may apply.
Should my RRIF take into consideration my long-term goals?
Because you’ll be withdrawing regularly from your RRIFs and may depend on them for regular income, it’s important to have a smart combination of holdings that balance access to cash for your short-term needs, and investments that grow for your long-term plans. Your financial planner can help you determine what you’ll need to be fulfilled throughout your retirement.
I have money left over. Now what?
If, after withdrawing the required minimums, you find you have money left over, consider contributing to your Tax-Free Savings Account. In your TFSA, that money can be invested, grow tax-free and you can withdraw it when you need it without paying tax on it. TFSA income won’t affect your income tax rate or other benefit payments.
What should I know about naming a beneficiary?
Lastly, there are important tax advantages to naming a beneficiary to your RRIF. If your spouse is listed as the beneficiary, they will inherit your RRIF tax-free, and can access funds immediately after your death. There are also special rules in Canada that enable you to receive significant tax credits when you name a charity as your beneficiary.
Well before it’s time to roll over your RRSPs into RRIFs, we encourage you to speak with a financial professional to ensure you’ll have the money you need, and minimize the taxes you can.
Have questions? Don’t hesitate to reach out! We’re here to help.