What you need to know about RRIFs

A Registered Retirement Income Fund (RRIF) is a registered account designed to give you income flow in retirement.

Think of a RRIF as a Registered Retirement Savings Plan (RRSP) in reverse – RRSPs allow you to accumulate tax-sheltered savings for retirement, while your RRIF generates a taxable retirement income stream from these savings – which still continue to grow and remain tax-sheltered.

In other words, you make tax-deductible contributions to an RRSP and receive taxable income withdrawals from a RRIF.

RRIF basics

You don’t make contributions to a RRIF. Instead, you open a RRIF by transferring money from your RRSP. It’s still a registered account, so your investment earnings remain tax-sheltered until you start to withdraw money. As well, a RRIF can typically hold all of the same types of investments as your RRSP.

You can roll your RRSP into a RRIF at any time, but you don’t have to until the end of the year in which you turn 71.

Similarly, you can start taking withdrawals from your RRIF as soon as the account is set up, but you must start taking out an annual minimum payment by December 31 of the year following the year the RRIF was established, and each year thereafter.

For example, if you open a RRIF in August 2020, you must make your first withdrawal on or before December 31, 2021. Your financial advisor can help you determine when the best time to open a RRIF is based on your individual circumstances.

Annual minimum withdrawals

The annual minimum withdrawal amount is calculated by multiplying the market value of your RRIF on December 31 of the previous year by a percentage set by the government, which increases with your age.

Important change for 2020 Read RRIF minimum withdrawals cut by 25% for 2020

If your spouse is younger than you, you can use their age to calculate the annual minimum amount. The lower the age, the lower the minimum amount – which means you’ll likely pay less income tax on the withdrawals. This could be a good strategy if you have other sources of income and want to leave money in your RRIF for as long as possible.

For example, some government benefits, like Old Age Security (OAS), are based on income levels. If your taxable income is too high because of your RRIF withdrawals, you risk receiving lower OAS payments.

Click here for a table that shows the current minimum withdrawal amounts depending on your age.

How withdrawals are taxed

Income tax is payable on any money you withdraw from your RRIF, including the minimum withdrawal amount. Anything you withdraw that exceeds the minimum withdrawal amount is also subject to a withholding tax, which is withheld at the time of withdrawal.

Here’s an example: Your annual minimum withdrawal is $2,400 and you withdraw $1,000 per month. That’s $12,000 per year, so you’ve exceeded the minimum withdrawal amount by $9,600, on which you’ll pay a 20% withholding tax (25% in Quebec).