1. What is a RRIF?
So you’ve been contributing to your RRSP for many years and are now ready to retire. What do you do with your RRSP now? That is where RRIFs come in. RRIFs (Registered Retirement Income Funds) are basically the successor to RRSPs. You can convert some or all of an RRSP to a RRIF at any time, but by the end of the calendar year you turn 71 any RRSPs in your name must be converted to a RRIF. Another option is to use some or all of your RRSP to buy an annuity. If you miss the deadline to convert your RRSP the balance will be included in your income for the year, just as if you withdrew all of the money.
2. You have to withdraw a minimum amount
Most of the time when RRIFs are discussed, the government mandated minimum withdraw schedule comes up. One of the reasons that the government created the minimum withdrawal schedule is to ensure that they get paid! Since the money went into your RRSP tax free, the government wants to get their tax money now. You can find the minimum withdrawal rates here.
So if your RRIF had a value of $700,000 as of last December and you turned 72 this year, you would have to withdraw at least $36,960 this year.
3. No withholding tax on RRIF withdrawals*
Unlike RRSPs, when you make a withdrawals from RRIFs there is often no withholding tax paid to CRA or withdrawal fees charged by the financial institution holding your account.
*If you withdraw more than the required minimum withdrawal from your RRIF you pay a withholding tax on that excess amount. For example, if your minimum withdrawal amount for the year was $25,000 and you chose to withdraw $30,000, you would pay withholding tax on $5000. Depending on your tax situation you may get some of that withholding tax back when you file your tax return.
4. Can use your age or spouse’s age to determine withdrawal rate
If your spouse is younger than you, you can elect to use their age to determine the minimum withdrawal rate. This works best if your RRIF is not going to be your primary source of income. If it is, then you are better off using your age since if you need to take more out than the minimum withdrawal, the excess is subject to withholding tax. Be careful when making this election because you can’t change it, even if your spouse predeceases you.
5. You can convert some or all of your RRSPs at any age
You can convert an RRSP to a RRIF at any time, you don’t have to wait until you turn 71. So if you retire at 55 you can convert some or all of your RRSP to a RRIF right away. If you have no income from other sources (that is you aren’t collecting CPP or OAS yet, have rental income, or other investments), then converting early can potentially save thousands in income tax. If you retire at 55 and convert your $300,000 RRSP that year, your minimum withdrawals would begin next year and would be $8,824.
This means you can take more out tax free than when you’re in your 70s since you don’t have CPP and OAS using up your minimum tax exemptions.
6. You can choose when you take the payments
You can choose to receive the payments from your RRIF monthly, quarterly, semi-annually or annually. If you want to change the frequency or amount of your RRIF payments, your financial institution may charge a fee. Some financial institutions also charge a withdrawal fee if you want to make an additional withdrawal from a RRIF.
7. You can make “in kind” withdrawals
If you are fortunate enough to have enough income from other sources and don’t need to actually withdraw cash from your RRIF, you can request “in kind” withdrawals. That means that instead of selling investments inside your RRIF and withdrawing cash, only to rebuy the investments in a TFSA or taxable account, you can have them transferred to one of those accounts. That means you save the transaction fees on the each of those potential transactions.
The amount of the withdrawal is fully taxable as income, regardless of whether you take the withdrawals in cash or securities.
8. Special beneficiary designation option
Like with RRSPs and TFSAs you can designate anyone as the beneficiary of a RRIF. But RRIFs (and TFSA, but not RRSP) also allow you to designate your spouse as a successor annuitant. This means that if you predecease them, your RRIF can be transferred directly into their RRIF without triggering any taxes. If there is no successor annuitant, then the RRIF becomes part of your estate for tax purposes.
9. Tax breaks
If you are over 65, RRIF income qualifies for the $2000 pension income credit. It also qualifies for income splitting.
10. You can convert back to an RRSP*
*if you are not yet 71
This one surprised us. If you retired early and converted an RRSP to a RRIF and you don’t end up needing the money from your RRIF, you can convert it back to an RRSP. This might make sense if you decided to go back to work and the RRIF withdrawals are putting you into a high tax bracket.