How RRIFs work?

What is a RRIF and how is it different from a RRSP?

Think of a RRIF as the older sister of your RRSP. There are several similarities between the two plans. Just like a RRSP, with a RRIF you can:

• Defer paying tax on your investments while they grow.
• Hold a variety of investments. You can choose to invest in:
  • mutual funds,
  • guaranteed investment certificates (GICs),
  • insurance GICs,
  • segregated fund contracts, or
  • other options that align with your risk tolerance and financial plan.

Kevin Potvin is the owner and principal financial advisor at Ottawa-based Potvin Financial Services. He says RRIFs:

• give you the flexibility to liquidate some of your funds if you need extra cash, and
• let you grow your investments and postpone your tax bill.

You can own more than one RRIF, and you can withdraw more than the minimum if you need it. Keep in mind that doing so will deplete your RRIF faster.

How much do you have to withdraw from your RRIF each year? 

RRIFs differ from RRSPs when it comes to withdrawals. RRIFs require minimum annual withdrawals based on your age. And you must continue to make these minimum withdrawals until no funds remain.

You pay tax on your retirement savings when you make withdrawals from your RRIF. You didn’t pay this tax when your money grew tax-free in your RRSP. You deferred your tax payment to a ‘later time’ while staying invested within your RRSPs. And by converting to a RRIF and making regular withdrawals from it, that ‘later time’ is now.

The Canada Revenue Agency (CRA) has a table showing the minimum withdrawal factors for RRIFs. The financial institution from which you bought your RRIF will calculate your minimum withdrawal dollar amount every year. As you draw down your savings, the rest of your money can keep growing in your RRIF, tax-free.

Note: If your spouse or common-law partner is younger than you are, you can make your RRIF last longer. How? By basing your withdrawals on your spouse’s age rather than yours. If you choose this option, you’ll need to register this information when you first open your RRIF account.

When do you have to withdraw from your RRIF?

You must start withdrawing money from your RRIF in the calendar year after you open your RRIF. For example, if you open a RRIF in 2021, you must start withdrawing from it at some point in 2022.

What if you don’t need the money right away? 

When you take money out of your RRIF, you will pay tax. But, if you don’t need the cash right away, there are ways to make the most of your required withdrawals. For example, after you’ve paid tax on your RRIF withdrawal, and if you have the contribution room, you can put the after-tax money into a tax-free savings account (TFSA). That way it can continue to grow tax-free. You could also put the after-tax money into non-registered investments. However, be prepared to pay tax every year on the non-registered account’s investment growth.

How do you transfer funds into a RRIF? 

You can fund your RRIF in several ways. Here are some of the most common:

• By transferring money from your RRSP or from another RRIF you own,
• By transferring money from your spouse’s RRSP or RRIF at your spouse’s death, or if you and your spouse separate or get divorced,
• From your employer’s deferred profit-sharing plan (DPSP), or
• From your spouse’s employer’s DPSP if your spouse has died, or if you and your spouse have separated or divorced.

In most cases, your bank or advisor will notify you when your RRSP is nearing the conversion deadline. At that point, they can offer you various retirement income options.

When should you convert your RRSP to a RRIF?

No one can own an RRSP after December 31 of the year they turn age 71. They must do something before that deadline or risk having to take the money from their RRSP into income, and pay tax on it all at once. By directly transferring their RRSP to a RRIF, they will defer tax.

Can you convert your RRSP to a RRIF before you’re 71? 

Yes. “A lot of people think they can’t open a RRIF until they’re 71. But you could do it at 30 if it makes sense with your situation,” says Potvin.

It may be beneficial to convert your RRSP to a RRIF early if you, for example:

• retire early,
• take a sabbatical, or
• have a leave from work due to a family emergency.

This is important since your loss of income might mean you’ll be in a lower tax bracket, says Potvin.

One example could happen if your spouse becomes ill, and you have decided to take time off work to care for them. During this time, you could convert your RRSP to a RRIF. Then, withdraw income from your RRIF to pay the bills while you’re not working. When you return to work, you can convert the RRIF back into an RRSP.

If you’re under 71, you can convert your retirement savings back and forth between a RRSP and a RRIF. Keep in mind, though, that you’ll still have to withdraw the minimum amount in the tax year you convert your RRIF back to a RRSP. Also, note that once you withdraw cash from any tax-deferred account you’ll have to pay tax on it. This applies to both RRSPs and RRIFs. So consult an advisor to find the most tax-efficient option for you.

How are RRIF withdrawals taxed? 

Keeping up with all the tax laws can be a challenge, and people may not always understand them. “In the absence of a rollover to a spouse on death, the remaining market value of your RRIF is taxable on your final return,” says Potvin. “Many people are surprised to hear this.”

This means your estate will be on the hook for a tax bill if you die and your RRIF account still has money in it. This is true, unless your beneficiary meets certain criteria. For example, you could name your dependent child or grandchild under 18 as the beneficiary. They could pay tax on the money they receive at their presumably low tax rate, or they could use the funds to purchase an eligible annuity that would pay income until the year they turned age 18. With the annuity, they would only pay tax on the annual annuity payments they received. The rest would remain tax deferred. For more information on transferring funds to your family, speak to an advisor.