The Registered Retirement Income Fund (RRIF) is a sort of extension of the Registered Retirement Savings Plan (RRSP). Here’s what you need to know about it.
The RRIF is a vehicle that allows you to disburse the RRSPs to which you have contributed during your working life. Withdrawing amounts from the RRIF will supplement your retirement income, in addition to your public pensions (QPP, PSV) and your employer pensions, if applicable. Once in a RRIF, your savings also continue to generate tax-sheltered returns.
Contrary to popular belief, you can transfer your RRSPs to a RRIF whenever you want, even at age 55. It will simply change the way certain calculations will be made when it comes to annual minimum withdrawals.
On the other hand, the financial planner André Lacasse, of Services financiers Lacasse, specifies that it is mandatory to convert his RRSPs into RRIFs no later than December 31 of the year of his 71e anniversary. Concretely, this means that the first withdrawal must be made and taxed the year of your 72e anniversary.
Minimum withdrawals
Many people see in an RRSP only the tax savings that it generates when you are still in the labor market. In doing so, we forget that it is rather a tax deferral granted by the government. The latter will recover all or part of this “gift” at the time of withdrawal.
This is why as soon as an RRSP is converted into a RRIF, a minimum withdrawal must be made each year, which is calculated according to age. For example, at age 71, you will have to withdraw 5.28% of the market value of the RRIF calculated at the beginning of the year. This percentage increases to 5.4% at age 72 and increases from year to year to reach the maximum of 20% at age 95 and over, or earlier if the sums have been exhausted. Withdrawals start from the year following the transfer.
Taxable amounts
Of course, it is possible to withdraw more if you wish, but you must remember that all the amounts taken out of the RRIF will be added to your income and will be taxable. However, will we pay less tax when we leave the labor market, since we will have less income than during our working life? Not so sure, says André Lacasse.
“Retirees have access to several advantageous tax credits, and as soon as their income rises, they risk losing all or part of them. Therefore, because of the marginal effective tax rate, it is no longer always true to say that our tax rate is lower in retirement”, mentions the financial planner.
Withholding tax
A withholding tax is also automatically made by the financial institution at the time of the withdrawal. But be careful, it may not save you a tax bill.
“There may be a significant adjustment depending on the income actually received during the year. This is why I recommend that my clients carry out an income simulation and request an increase in the withholding tax to avoid unpleasant surprises, if necessary,” indicates André Lacasse.
Backtracking
Note that even if you have converted your RRSPs into RRIFs, it is still possible to reverse course before December 31 of the year of your 71st birthday. You could therefore transfer your RRIFs to RRSPs. Before the deadline, you don’t have to convert all your RRSPs into RRIFs either, and you can proceed in installments to reduce the amount of minimum withdrawals if it’s more tax-efficient.
Annual or monthly withdrawals?
Is it better to make withdrawals once a year or monthly? “Usually, we like to have a certain stability of retirement income. Monthly payments can be more practical to better control your budget,” says André Lacasse. Apart from this consideration, there is not really any advantage to choosing one formula or the other.
“Of course if the stock market goes up during the year, then it will be more profitable to make monthly withdrawals, but it’s the opposite if the stock market goes down. Since it is very difficult to predict how the market will behave, in general we will choose what is most practical for the person,” notes André Lacasse.
Advice
- RRIF withdrawals are income eligible for the federal pension income credit, which may qualify for a 15% credit on the first $2,000.
- If your spouse is younger, you could use their age instead of your own to determine the minimum withdrawal percentage. Doing so will reduce the amount of withdrawal to be made, which can be tax-efficient.
- It is possible to “roll over” a RRIF without tax impact to the surviving spouse by mentioning it in their will.