Let's Talk: Registered Retirement Income Fund (RRIF)

Expanding a little bit more on last week's topic of RRSPs. This week, I'll be covering Registered Retirement Income Funds (RRIF).

How Does It Work?

RRIFs can be considered a type of annuity. This just means that you receive regular payments for a period of time. Your RRSP is used to save funds for your retirement. Your RRIF is used to pay for your retirement. RRSPs becomes RRIFs at any point you decide you are finished with saving funds and want to withdraw the balance in your account. You are required to convert your RRSP into a RRIF at the end of the year you turn 71. Alternatively, you have the option to buy an annuity using your RRSP with a trust or insurance company that offers it.

Recalling my RRSP post, you would be double-taxed if you withdrew from your RRSP. When it comes to a RRIF, there is a special feature to help you avoid being taxed twice depending on how much you decide to withdraw. This feature is called the 'Minimum Withdrawal rule'. Each year, starting with the year you converted your RRSP into a RRIF, you are forced to take out a percentage of your savings. There is no maximum but there is a minimum amount each year you are required to withdraw. If you wanted to, you could take out your entire RRIF but you will also have a very large tax bill. This is because you now suddenly have a very large income that needs to be reported. Recall that your RRSP grows tax-deferred until you withdraw. Again, the same rules apply here to your RRIF.

If you withdrew the minimum amount from your RRIF, you can avoid paying withholding taxes. The income you receive would only be subject to income taxes. However, if you withdrew over the minimum amount, the excess amount would be subject to both withholding and income taxes. Below is a chart for the current minimum withdrawal rates:

It is advisable to stretch the withdrawal as long as you can so your money can continue to grow tax-deferred and to pay as little tax as possible. However, the amount you withdraw will be based on your personal spending needs in retirement. It's important to understand how it works so you may plan accordingly. Just remember these numbers may change. They are current as of the time of my post but refer to this 'link' for updated numbers.

Upon Death

When you die, the entire RRIF amount goes to your named beneficiaries after being taxed. Similar to the TFSA, you can name your spouse as a successor for your RRIF. In this case, upon your death, your spouse would continue to receive payments from your RRIF. Your spouse would need to pay the tax of your RRIF as they receive it.

Rules to Remember

• Withdrawal rule increases with age
• You may name your spouse as successor to avoid full taxation of your RRIF
• Due to COVID-19, for 2020, the government has lowered the withdrawal percentage rate by 25%. The numbers on the chart should be reduced by 25% to help retirees prolong their savings