Even fewer people are aware that you have to close your RRSP at the end of the year in which you turn 71. At that point, you have three choices as to what to do with the investments in your RRSP:
- Withdraw all of your savings (which is not recommended, given that the whole amount would be classed as taxable income).
- Convert your RRSP to a RRIF.
- Transfer the investments to an annuity (an insurance product that provides regular payments for a set period of time).
Most Canadians choose to convert their RRSP to a RRIF (we’ll go into those reasons later in the article). A RRIF is a government-registered, tax-sheltered fund that allows you to move your RRSP investments over without having to cash them in first (which means you avoid a large tax bill, as well as the inconvenience and cost of selling and rebuying investments held in your RRSP portfolio). You can then start withdrawing money from your RRIF, as part of your retirement income. This can be any amount, as long as you make the minimum annual withdrawal, as determined by federal regulations.
To help you decide whether a RRIF is a good choice for you, let’s take a deep dive into how a RRIF works, including RRIF minimum withdrawals, RRIF withholding tax and how to get the most out of your RRIF.
How does a RRIF work?
When it comes to a RRIF versus an RRSP, there are some similarities. Any growth in your investments (though interest, dividends and capital gains) occurs tax-free until it’s withdrawn (at which point it’s treated as taxable income). You can open a RRIF with the same financial institution that holds your RRSP or you can switch to another provider.
The key difference between a RRIF versus an RRSP is that you make contributions to an RRSP, but once you’ve converted your RRSP to a RRIF, you can’t make any further contributions to the RRIF. Typically, an RRSP is for saving for retirement, while a RRIF provides you with income when you’re in retirement.
Most people choose to open a RRIF when they’re about to retire or become semi-retired. The savings in your RRIF are meant to last until you die, so it would be rare (and probably unwise) for anyone to transfer savings from their RRSP to their RRIF before they’re ready to retire (though technically there is no minimum age for doing so).
Many people open a RRIF at some point in their 60s, but if you still have an RRSP when you turn 71, you must transfer it to a RRIF by the end of that year. RRIF withdrawals will begin the following year.
You’ll have to make a RRIF minimum withdrawal every year (though you can withdraw more if you need it) and the money is treated as taxable income. The amount will depend on your total taxable income from your RRIF and other sources.
When you’re ready to convert your RRSP to a RRIF, simply inform your financial institution, and they will get the process started. If you’ve decided to open a RRIF with a different financial institution than the one that holds your RRSP, the process is a little more complicated, so give yourself some extra time to arrange it.
Which investments can be held in a RRIF?
A Registered Retirement Income Fund is similar to an RRSP in the kinds of investments that can be held within it. While there are some limitations, in general, you can hold these investments in your RRIF:
- Cash savings accounts.
- Guaranteed Investment Certificates (GICs).
- Government and corporate bonds.
- Mutual funds.
- Exchange-traded funds (ETFs).
- Individual stocks that are listed on designated stock exchanges.
One of the main advantages of a RRIF versus an annuity is that you have more control over your investments. You can choose exactly which types of assets are in your RRIF, whereas with an annuity, that choice is made for you.
RRIF minimum withdrawals
Registered Retirement Income Funds are specifically designed to provide you with income during your retirement, so you have to make a minimum withdrawal every year. The minimum amount is usually based on your age, but you can choose to base RRIF withdrawals on your spouse’s age if they’re younger than you. This can be a good idea if you don’t need the larger amount and would rather pay less in tax.
RRIF minimum withdrawals are based on percentages of the entire value of your RRIF investments. Here are some examples:
Age RRIF minimum withdrawal
71 5.26%
75 5.82%
80 6.82%
85 8.51%
90 11.92%
95 and older 20%
You can find RRIF withdrawal rates for other ages on this Government of Canada webpage. You can withdraw more than your annual RRIF minimum withdrawal, but you may have to pay a withholding tax.
How the RRIF withholding tax works
IFor some retirees, the annual RRIF minimum withdrawal may not be enough to enjoy a comfortable retirement. In this case, you can withdraw more than the minimum, however, your financial institution will charge a RRIF withholding tax on the additional amount withdrawn. These are the withholding tax amounts:
Withdrawal amount RRIF withholding tax RRIF withholding tax
above the minimum percentage percentage (Quebec)
Up to $5,000 10% 5%
$5,000-$15,000 20% 10%
Over $15,000 30% 15%
You still need to claim the whole amount that you withdraw as taxable income; depending on your overall taxable income and tax situation, you may have to pay more in income tax or you could receive a refund.
The pros and cons of a RRIF
As we mentioned, if you have savings in an RRSP, when it’s time to retire and use those savings to provide retirement income, you only really have two choices: convert your RRSP to a RRIF or use the funds to buy an annuity.
The main advantage of an annuity is that you have the peace of mind of knowing that you’ll receive a set amount of money for an agreed length of time (which is usually the rest of your life). Some annuities also extend the payments until the death of the surviving spouse, while others guarantee to pay out the principal balance of the annuity (what’s left of the amount that you initially paid into it) to your heirs if you die before receiving that amount.
However, there are some good reasons why RRIFs tend to be more popular than annuities for retirees with RRSP savings. These include:
More flexibility: you get to have a say in which investments your money is invested in. Retirees are living longer than ever, so you can choose to have a portion of your RRIF portfolio made up of investments with more growth potential and the remainder consisting of safer investments, such as bonds. Ultimately, RRIFs give you more control over your money.
Greater potential growth: with a Registered Retirement Income Fund, your investments continue to grow without any tax until you withdraw from it. This, combined with investing in potentially high-growth stocks can help make your money last longer. Obviously, with all riskier investments (such as stocks), there is also the chance of losing money.
A potentially larger legacy: once the surviving spouse dies, annuity payments typically end, whereas any investments left in a RRIF when the holder dies can be shared among their beneficiaries (though there may be some tax consequences for the deceased’s estate).
How to get the most out of your RRIF
Most people will have a variety of retirement income sources, and not all of them will necessarily be available all at once (and from a tax viewpoint, you may want to stagger the amount of your retirement income as much as possible).
For example, you might be expecting retirement income from a private RRSP that you’ll be transferring to a RRIF, as well as income from a company pension plan, the Canada Pension Plan (CPP, or QPP in Quebec) and Old Age Security (OAS).
One strategy could be to start drawing income from your RRIF a little earlier than other retirement income sources. This could allow you to delay drawing CPP/QPP or OAS, which will boost the amounts you’ll receive, for the rest of your life. Find out more about the right time to begin taking CPP/QPP benefits.
Here are some more ways of getting the most out of your RRIF:
You can make your savings last longer and pay less in tax in the early stages by basing your RRIF minimum withdrawals on your younger spouse’s age. Just be aware, though, that once you’ve made this decision, you have to stick with it.
If you name your spouse as the RRIF’s “successor annuitant”, the RRIF will pass to them after your death without any estate taxes, and payments can continue uninterrupted.
If you don’t have a spouse, name a beneficiary for your RRIF, which will keep your RRIF investments out of your estate. This can bring several benefits, including avoiding probate fees.
RRIF withdrawals qualify for the Pension Income Tax Credit of up to $2,000, which can help reduce your overall tax bill.
You can choose to receive payments at a frequency that works with your budget, for example, weekly, monthly or quarterly.
While you can’t contribute to a RRIF (and have to stop contributing to your RRSP once you reach 71), you can continue contributing to your spouse’s RRSP.
If you don’t need all of the money from your RRIF minimum withdrawals, any excess amounts can be reinvested by contributing them to a Tax-Free Savings Account.
Plan ahead for converting your RRSP to a RRIF
It’s really important to prepare for opening a RRIF well in advance. A few things you’ll need to consider are:
- Will the minimum RRIF payments be enough to help fund your retirement?
- How will the RRIF payments fit in with your other sources of retirement income?
- Will you be sticking with the same financial institution or switching?
- Will you need to change the mix of investments in your RRIF portfolio?
- Who will you name as the beneficiary?
Your IG Advisor can help with all of these questions; they can also make sure that the timing of the opening of your RRIF, as well as the mix of investments held in it, fit in with your overall financial plan.
If you’re approaching retirement, call your IG Advisor to discuss opening a RRIF and how to get the most out of it. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).
