The federal government has set up several powerful tax-deferred savings vehicles for Canadians. One of them is the registered retirement income fund (RRIF), which is available to anyone with a registered retirement savings plan (RRSP) — and some other registered pension plans — but is of particular interest to Canadians once they reach the age of 71.
Here’s what you need to know about this important income-generating retirement option.
What is an RRIF?
A RRIF is a federally registered account that provides you with a steady stream of income that you can continue to draw on during retirement. It is essentially a continuation of your RRSP and functions in much the same way, however, you can only make withdrawals and can no longer make deposits with a RRIF.
How does a RRIF work?
RRSPs are excellent vehicles for securing retirement savings, but they are not open ended. Account holders are required to convert their RRSP into an income-generating account, such as a RRIF or annuity, by the end of the year in which they turn 71. If you don’t convert an RRSP by that deadline, it then becomes “deregistered,” the financial intuition pays out the balance to you in cash, and the full amount is taxed as income when you file your annual return.
If you elect to turn your RRSP into a RRIF, you can keep your money in a tax-deferred account and avoid a large tax bill when you turn 71. However, you can no longer make deposits into the account and you must withdraw a minimum amount annually starting the following year. That minimum withdrawal amount, which is taxable, is determined by the Canada Revenue Agency based on your age and account balance.
For example, if you are 72 years of age, your withdrawal rate is 5.4 per cent. If you have $100,000 in your RRIF, your minimum required withdrawal for that year would therefore be $5,400 ($100,000 x 0.054). You can set up monthly, quarterly, semi-annual or annual withdrawals.
You are allowed to take out more than the minimum amount, but you can never withdraw less than the legally required minimum. While all RRIF withdrawals are added to your taxable income when you file your annual return, withdrawals in excess of the minimum amount will have some income tax withheld at the source and remitted to the CRA in advance. Don’t worry if this seems to be overwhelming, your financial institution will calculate the amount owing for you on request.
Since the amount you have to withdraw increases as you age, the government gives you the option of making withdrawals based on the age of your spouse or common-law partner if he or she is younger.
You don’t have to wait until the deadline to open an RRIF. You can convert an RRSP, or part of an RRSP, to a RRIF at any time before you turn 71. This can be a good option for those who retire in their 50s and 60s and are looking for a reliable source of income. Just remember that once you convert an RRSP into an RRIF, you are legally required to make set yearly withdrawals and you will no longer be able to contribute to the account. You can hold both RRSPs and RRIFs concurrently, just as long as you convert all your RRSPs by the end of the year in which you turn 71.
If you do elect to start an RRIF before you turn 71, you can figure out your annual minimum withdrawal rate using the following calculation: 1 ÷ (90 – your age). So, for example, at age 65, the withdrawal rate is 4.0 per cent (1 ÷ 25).
How to open a RRIF
You can open a RRIF at any Canadian bank, trust company or credit union. You can also start a RRIF with an insurance company, mutual fund company or an investment firm. You can hold cash, guaranteed investment certificates (GICs), stocks and bonds or ETFs in your RRIF.
The institution where you decide to hold your RRIF will help you set it up. The process is straightforward and the institution will help you fill out the paperwork. Once you set up a RRIF you will also then be able to select how often you want to receive payments (i.e., monthly, quarterly, semi-annual or annually). You can also transfer a RRIF from one bank to another but there may be a transfer fee.
How many RRIFs can I have?
There are no limits on the number of RRIFs you can have. However, because you are required to receive minimum payments out of each RRIF account each year, it could become confusing and hard to manage if you hold too many RRIFs.
What is a Self-Directed RRIF?
A self-directed RRIF is an account that lets you manage the investments within your RRIF on your own. It’s generally suitable for more experienced investors who like to take a hands-on approach to investing and who like to buy and sell their own stocks, bonds and ETFs. It’s important to note that not all investments may be eligible to form part of a RRIF and there could be serious tax consequences if you choose a non-qualifying investment.
Concerning self-directed RRIFs, the Government of Canada website states that “You should pay particular attention to the type of investments you choose for the plan. If you buy non-qualified investments in your RRSP or RRIF, or if qualified investments held in your RRSP or RRIF become non-qualified, there are tax implications.”
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How is my RRIF protected?
Any cash or term deposits (such as GICs) held in a RRIF account at a Canadian financial institution that is a CDIC member are protected up to $100,000 by the Canada Deposit Insurance Corporation.
If you have investments in a RRIF account with a financial institution or firm that is a member of the Canadian Investor Protection Fund, they are covered by the CIPF for up to $1 million. Speak to your financial representative to ensure you know how your account is protected.
What happens to my RRIF when I die?
If you don’t name a beneficiary, the funds in your RRIF become part of your estate and will be taxed as income on your estate’s final return. If you name a qualified beneficiary for your RRIF, namely a spouse or dependent child/grandchild, the value of the account can be transferred to the beneficiary’s RRSP, RRIF or other applicable registered account and no taxes are payable.
If you name a non-qualified beneficiary, such as a sibling or adult child/grandchild, the beneficiary will receive the value of the RRIF account, but it is your estate, not the beneficiary, that must report that money as income for tax purposes.