What it means
During working life, an RRSP lets people save tax-free, with the tax deferred until money is taken out. At some point the tax authority requires the savings to be converted into income.
A RRIF is one of the main ways to do this, along with buying an annuity or withdrawing the money in full. Inside the RRIF, the money stays invested, and the holder can choose from similar investments to those in an RRSP.
There are no new contributions, but the investments continue to grow without tax while they remain in the account. This allows retirees to keep their money working while drawing income.
Each year, the holder must take out at least a minimum amount. The minimum is the account balance at the start of the year multiplied by a percentage factor, which is set by the tax authority and rises as the holder gets older.
The holder can withdraw more than the minimum, but not less. All withdrawals are added to taxable income, so planning the amount is important.
Taking too much in a year can push the retiree into a higher tax bracket and may reduce income-tested benefits. Taking only the minimum helps preserve capital, but it may not cover living costs.
Tax is usually withheld on amounts above the minimum, and no tax is withheld on the minimum itself. A holder can also base the factor on the age of a younger spouse, which lowers the minimum and keeps more money in the account.
This is a useful choice for people who want to preserve their savings. A RRIF does not guarantee income for life.
If the investments perform poorly, or the holder withdraws heavily, the money can run out. People who value certainty may combine a RRIF with an annuity or a workplace pension to cover their basic expenses.
In practice
Real-world examples.
Example
A 71-year-old retiree converts his RRSP of $600,000 into a RRIF. At an illustrative factor of 5.5%, he must withdraw at least 600,000 x 0.055 = $33,000 in the first year. He sets up monthly payments to his bank account.
Example
A retired teacher has a pension that covers her basic costs, so she wants to take only the minimum from her RRIF. She names her younger husband as the reference for the factor, which lowers the minimum. Her money stays invested for longer.
Example
A financial planner builds a retirement plan for a couple. She models how much to withdraw from each RRIF each year so that their taxable income stays below the next tax bracket. The plan aims to smooth tax over their retirement.
Formula
Calculation
Minimum annual withdrawal = account balance on 1 January x prescribed minimum factor
Suppose a retiree has a RRIF balance of $400,000 at the start of the year, and the prescribed factor for her age is 5.5% (the real factor is set by the tax authority and changes with age). Minimum withdrawal = 400,000 x 0.055 = $22,000. That is about $1,833 a month. If she wants to take $30,000 instead, the extra 30,000 - 22,000 = $8,000 will normally have tax withheld at source.Case study
Seen in the real world.
Dunmore Family is an illustrative, fictional household in which both partners converted their RRSPs into RRIFs. One partner had $500,000 and the other $200,000, and both wanted to leave the money invested.
The minimum withdrawals at a factor of 5.5% were 500,000 x 0.055 = $27,500 and 200,000 x 0.055 = $11,000. The family planner noticed that the partner with the larger RRIF was close to a higher tax bracket when other income was included.
She suggested using the younger partner's age to set the factors and spreading extra withdrawals between the two accounts. The illustrative lesson is that RRIF decisions are as much about tax planning as about income.
Watch out
Common mistakes.
- Withdrawing more than needed in a single year and pushing taxable income into a higher bracket.
- Assuming a RRIF provides guaranteed income for life, when it depends on investment results and the withdrawals taken.
- Ignoring the minimum withdrawal rule and facing tax consequences or penalties.
Questions
People also ask.
When must an RRSP be converted?
It must be converted, usually to a RRIF or an annuity, by the end of the year in which the holder reaches the age set in the tax rules.
Can I take out more than the minimum?
Yes, you can withdraw any amount above the minimum, but extra withdrawals are taxed and may have tax withheld.
What happens to a RRIF when the holder dies?
The balance can often pass to a spouse on a tax-deferred basis, or it is added to the final tax return, depending on the beneficiary and the rules.
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