How the Registered Retirement Income Fund (RRIF) works is not always well understood. This little guide will help you find your way around.
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The RRIF is somewhat an extension of the registered retirement savings plan (RRSP) to which one contributes during one’s working life and which constitutes the latter’s disbursement vehicle. When to transfer your RRSP to the RRIF? How much should be withdrawn each year? And when? Here’s what you need to know.
How it works
It is mandatory to convert your RRSPs into RRIFs no later than December 31 of the year of your 71st birthday, reminds the tax specialist and financial planner of the Financial Professionals Alexandre Hunault. “However, nothing prevents you from doing it earlier if you retire before age 71,” he says. Once in the RRIF, your savings continue to generate tax-sheltered returns.
If you are under 71, you should also know that you do not have to convert all of your RRSP into a RRIF, you can transfer only part of it.
Once the conversion has been made, you will then have to withdraw a minimum amount annually, starting the year following the transfer. The RRSP having made it possible to reduce the tax bill at the time when one contributed, the taxman therefore wishes to recover part of his bet by requiring that a minimum be withdrawn, an amount which will obviously be taxed in the year of the withdrawal. .
However, these withdrawals from a RRIF are eligible income for the federal pension income credit. Thanks to this, if you declared eligible retirement pension income, you could be entitled to a maximum amount of $2,000.
The minimum withdrawals to be made are calculated according to a percentage which increases with age, until the funds are exhausted. For example, in 2022, it is 5.28% at age 71, 5.40% at age 72, 5.53% at age 73, and it gradually climbs to reach 20% at age 95 and over.
This percentage is calculated on the market value of the RRIF at the beginning of the year, taking into account the age of the annuitant on January 1st.
The advantages of the RRIF
You can withdraw as much money as you want from your RRIF, up to its market value, of course. “Withdrawals can be monthly or annually, at the convenience of the annuitant. This allows you to better manage your budget, since you can control your retirement income,” says Alexandre Hunault.
In addition, a withholding tax withdrawal is made automatically at the time of the withdrawal, which avoids ending up with a tax bill when filing your annual income tax. We can also consider the RRIF as a tax shelter, in the sense that it allows the continuation of the effect of tax-free returns on investments from the RRSP account to the RRIF.
The tax specialist indicates that if your spouse (common-law partner or spouse) is younger than you, you could use his age rather than yours to determine the percentage of the minimum withdrawal, which will have the effect of reducing the minimum amount to be withdrawn and helps extend the benefits of this tax shelter even further!
Already 71, but have unused space in your RRSP? You can no longer contribute to your own RRSP, but you still have the option of contributing to a spousal RRSP if he is under 71 years old. The tax savings realized will compensate for the minimum withdrawal from the RRIF, which is taxable to him. It is also a way to balance retirement income and the tax bill between spouses.
TIPS:
- If you have already started to withdraw your RRSP before age 71, since the applicable withdrawal scales are much lower before this age (for example, it is 3.33% at age 60), it may be worth converting your RRSP in installments, as needed. By transferring only the minimum portion to be withdrawn annually to the RRIF and keeping the rest of your assets in an RRSP, you will be able to benefit from the tax deferral for longer, while potentially having access to the tax credit for pension income. .
- This method is valid only if your financial needs do not exceed the minimum withdrawals. If you need more funds because your retirement income is insufficient, it will not be possible to apply it.
- Consult a financial planning professional for the best course of action for your situation.