The Ins and Outs of RRIFs
5 Top Questions Answered
By Susan Gottlieb
You can think of a Registered Retirement Income Fund (RRIF) as an extension of your Registered Retirement Savings Plan (RRSP). Your RRSP is used to save for your retirement while your RRIF is used to provide you with retirement income. The main benefit of a RRIF is that it provides you with maximum flexibility in establishing an income stream during your retirement. Although you are generally required to take a minimum payment from your RRIF each year, there is no maximum and you can make withdrawals as often as you wish. Another major advantage of a RRIF is that the assets that remain in the plan continue to grow on a tax-deferred basis until you withdraw them. This article focuses on the main considerations associated with receiving income from your RRIF, including calculating your minimum payment as well as the withholding taxes on your RRIF withdrawals. Any reference to a spouse in this article includes a common-law partner.
Establishing your RRIF
Usually, you can only contribute to a RRIF by directly transferring certain property to it. You can establish a RRIF by transferring amounts from an RRSP, a Pooled Retirement Pension Plan (PRPP), a Registered Pension Plan (RPP), a Specified Pension Plan (SPP) or from another RRIF.
Starting in the year after the year you establish a RRIF, you have to take an annual minimum amount. In other words, there is no minimum payment required in the calendar year in which you convert your RRSP to a RRIF.
The minimum amount is calculated based on your age at the end of the previous year. If you have a spouse, you can elect to have the minimum payment calculated based on your spouse’s age. If your spouse is younger than you, this will lower your required minimum payment. You must make this election when you first establish your RRIF. Once you make the election, you cannot change it at a later date, even if your spouse dies. You would have to transfer your existing RRIF assets to a new RRIF in order to make a new election for whose age to use in calculating your minimum payments. Keep in mind, that when you open a new RRIF, you must receive the minimum payment for the year. The minimum cannot be transferred to the new RRIF.
Although there are various maturity options for your RRSP, you may decide to transfer your RRSP property to a RRIF. You can do so at any time, however you must do so by the end of the calendar year in which you turn 71. The investments held in your RRSP should be transferred directly into the RRIF account. You are generally not required to liquidate your RRSP investments prior to transferring your RRSP property to a RRIF. In the case where you convert all or part of your RRSP to a RRIF before age 71, you are able to transfer the value of your RRIF in excess of the annual minimum payment back to your RRSP.
Receiving income from your RRIF
You can withdraw more, but not less than the annual minimum. The excess amount you withdraw from your RRIF cannot be applied as part of your minimum for the next year. You can choose to receive your RRIF payments monthly, quarterly, semi-annually or annually, depending on your income requirements. If you do not require income from your RRIF to meet your financial needs, you may consider receiving the annual minimum payment at the end of the year to maximize the tax-deferral benefits of your RRIF.
Calculating your RRIF minimum payment
Your RRIF minimum payment for each year, after the year your RRIF is established, is calculated by multiplying the fair market value (FMV) of your RRIF at the end of the previous year by a prescribed percentage factor. The prescribed percentage depends on your age or your spouse’s age (if applicable) at the end of the previous year (depending on whose age you elected at the time the RRIF was established).
For ages under 71, the prescribed percentage factor is calculated by the following formula: 1/(90 – age on December 31 of the previous year) x 100
For example, if the RRIF is based on your age, and you are age 56 as of December 31 of the previous year, the prescribed percentage factor would be 1/ (90 – 56) x 100, or 2.94%. If the value of your RRIF at December 31 of the previous year is $500,000, then your required RRIF minimum payment for the year would be $14,700.
For ages 71 and older, the prescribed percentage factor is found in the tax regulations. Please refer to the RRIF minimum table for the prescribed percentage factors as set out in the regulations.
For example, if the RRIF is based on your age, and you are age 75 as of December 31 of the previous year, the
prescribed percentage factor per the regulations would be 5.82%. If the value of your RRIF at December 31 of
the previous year is $500,000, then your required RRIF minimum payment for the year would be $29,100.
Taxes on RRIF income
Your RRIF withdrawals are included in your taxable income and are subject to tax at your marginal tax rate. Your total taxable income will determine your total taxes payable. However, there are certain cases (discussed in the next section) in which financial institutions are required to withhold taxes from your RRIF payments. These amounts withheld are remitted to the Canada Revenue Agency (CRA) on your behalf and are a credit towards your total taxes payable.
Withholding taxes
The amount you withdraw from your RRIF determines the rate of withholding tax that will apply to your withdrawal. There is no withholding tax applied to your minimum payment from the RRIF. If you elect to receive an amount above the minimum payment, income tax will be withheld at source on the amount in excess of the minimum. The withholding tax rates for Canadian residents are the same for all provinces and territories except Quebec.
Conclusion A RRIF provides you with maximum flexibility in planning for your retirement. Ensure that you have a good understanding of how RRIF withdrawals work to better plan for your retirement cash flow.
Due to space limitation, we are unable to reproduce the entire 6-page article. Feel free to request an e-copy (in addition to a chart of the 2021 registered plan minimum and maximums) from me at susan.gottlieb@rbc.com or reference at www.susangottlieb.com
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