A Registered Retirement Income Fund, or RRIF, is intended to provide Canadians with income during their retirement. Unlike other retirement savings vehicles, you don’t contribute to a RRIF. The money comes from what’s been accumulated in an RRSP during a person’s working years.
How do you get a RRIF?
An RRSP must be collapsed and converted to a RRIF (or registered annuity) by the end of the calendar year in which the accountholder turns 71. You can roll an RRSP into a RRIF before age 71, but once you establish a RRIF you have to withdraw the mandatory minimum withdrawal amount every year. Early converters do have the option to revert back to an RRSP, but it must be converted back again by age 71.
Mandatory minimum withdrawals
The amount is based on a percentage set by the Canada Revenue Agency (CRA) and the rate is on a sliding scale with the percentage rising with the accoutholder’s age. The withdrawal rate increases steadily each year until age 95, when it’s capped at 20 per cent. The required minimum in dollars is that factor multiplied by the fair market value of your RRIF on January 1st each year.
You can set up regular payments or request them on an ad hoc basis, as long as you withdraw the minimum by the end of each calendar year.
RRIF income is taxable
Canadians get tax deductions for making RRSP contributions, but money coming from a RRIF isn’t tax-free. That deduction merely means you are delaying paying income tax, but not avoiding so altogether.
When the money comes out of an RRSP — whether during retirement, or any other time — that income will be taxed just like any other income you earn. All RRIF income is considered taxable and must be claimed when filing your tax return, so you should carefully consider how much to take out of a RRIF and when.
RRIF growth is sheltered from taxes
While the money you put into an RRSP will be taxed when it comes out of a RRIF, investments inside the plan are not subject to taxation. That includes gains from any and all earnings or growth on the underlying investments.
Pretty much anything that can be held in an RRSP can also be held in a RRIF, so the actual investments don’t need to change when you convert. A RRIF allows the accountholder to maintain a high degree of control over the investments held in the plan.
To ensure the government gets their money up front, RRIF withdrawals beyond the mandatory minimum are subject to withholdings taxes. These are applied at source by the RRIF carrier, which is just the term given to the institution that maintains your account. The general rule is that the RRIF carrier must withhold 10 per cent on excess payments up to $5,000, 20 per cent if the excess payment is between $5,000 and $15,000, and 30 per cent on excess payments of more than $15,000.
What is the lifespan of a RRIF?
The longevity of your RRIF is affected by how much you make in investment returns and how much you take from the plan for retirement income. When your returns are higher than your income, the RRIF will grow in value. If withdrawals amount to more than the returns from the investments then the plan will decline in value.
There’s no penalty for exhausting a RRIF at any age or stage (after 71), but you need to realize that the more income withdrawn, the more that will be lost to taxes. That can be up front in the form of withholding taxes, and potentially more for those who have multiple sources of income.
Bankruptcy and death
RRIF accounts are largely protected from creditors if you were to declare bankruptcy; however, they might be able to seize assets in a RRIF that was open for 12 months or less.
Any assets remaining in a RRIF when someone dies, will go to the named beneficiaries or the deceased person’s estate. Also, it is possible to designate a beneficiary who is a spouse as a successor annuitant, which means the RRIF payments would continue, but payable to the surviving spouse, with no need to liquidate any assets.
Anyone who saves for their retirement via an RRSP is going to end up having a RRIF, the vehicle intended to provide Canadians with income in retirement.