Registered Retirement Income Funds (RRIFs) are essential to retirement planning for many Canadians. These accounts are designed to provide a steady income stream in retirement, taking over from your RRSP when you’re ready to start withdrawing funds. However, there’s a lot of confusion and misinformation about how RRIFs work and what they mean for your retirement finances.
In this blog post, I’ll separate fact from fiction when it comes to RRIFs.
RRIF Conversion Age
Fact: You must convert your RRSP to an RRIF by the end of the year you turn 71. This is a legal requirement, not a suggestion. You can convert earlier if you wish, but 71 is the latest. Many people choose to convert some or all of their RRSP to an RRIF before 71 to take advantage of tax credits or manage their income.
Minimum Withdrawals
Fact: RRIFs have required minimum annual withdrawals. The minimum amount increases each year as you get older. These withdrawals are based on a percentage of your RRIF’s value at the start of the year. You can always withdraw more than the minimum, but not less.
RRIF Flexibility
Fiction: You can’t change your RRIF once it’s set up. In reality, RRIFs offer quite a bit of flexibility. You can change your investment mix within the RRIF at any time. You can also have multiple RRIFs and transfer funds between them. This flexibility allows you to adjust your strategy as your needs change in retirement.
Tax Implications
Fact: RRIF withdrawals are taxed as income. The financial institution will withhold some tax, but you may owe more when you file your tax return. It’s important to plan for this tax liability. You can ask for an additional tax to be withheld if you’re concerned about owing a large amount at tax time.
Investment Options
Fiction: RRIFs limit your investment choices. Actually, RRIFs offer the same wide range of investment options as RRSPs. You can hold stocks, bonds, mutual funds, ETFs, and more in your RRIF. This allows you to create a diversified portfolio that matches your risk tolerance and income needs in retirement.
RRIF Beneficiaries
Fact: You can name a beneficiary for your RRIF. If your spouse is the beneficiary, they can transfer the RRIF to their own RRIF tax-free. For other beneficiaries, the RRIF value is generally paid out and taxed as part of your final tax return. Proper beneficiary designation can help with estate planning and potentially reduce probate fees.
Early Withdrawals
Fiction: You can’t access RRIF funds before retirement. You can actually convert part or all of your RRSP to a RRIF at any age. Some people do this to access funds penalty-free before age 71. However, remember that RRIF withdrawals are taxable, so this strategy should be used carefully.
RRIF and Government Benefits
Fact: RRIF income can affect your government benefits. RRIF withdrawals count as income and could reduce income-tested benefits like Old Age Security (OAS). It’s essential to plan your RRIF withdrawals strategically to minimize the impact on your benefits. Some people use TFSAs alongside RRIFs to manage their taxable income in retirement.
Spousal RRIFs
Fact: You can have a spousal RRIF. If you’ve been contributing to a spousal RRSP, it will become a spousal RRIF when converted. The withdrawal rules are the same as those for a regular RRIF. However, if withdrawals are made within three years of any spousal RRSP contributions, the income might be attributed back to the contributing spouse.
RRIF Collapse
Fiction: You must collapse your RRIF at a certain age. There’s no requirement to collapse or close your RRIF at any age. You can keep your RRIF for as long as you live, making the required minimum withdrawals each year. This allows for continued tax-deferred growth on the funds remaining in the RRIF.
Withholding Tax
Fact: RRIF withdrawals are subject to withholding tax. The rate depends on the amount withdrawn, ranging from 10% to 30% for residents of Canada. This withholding tax is an advance payment on the income tax you’ll owe on the withdrawal. You may owe more or get a refund when you file your tax return, depending on your total income for the year.
RRIF Transfers
Fact: You can transfer your RRIF between financial institutions. This transfer must be done directly between institutions to avoid tax consequences. You might do this to access different investment options or to consolidate your accounts. Remember to consider any fees or penalties before making a transfer.
In-Kind Withdrawals
Fiction: RRIF withdrawals must be in cash. You can actually make “in-kind” withdrawals from your RRIF, meaning you can withdraw investments without selling them. The value of the investment on the day of withdrawal is considered income. This can be useful if you want to hold onto certain investments but need to meet your minimum withdrawal requirements.
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