How Does a RRIF Work?

This article is timely, with the end of the year in sight.

A Registered Retirement Income Fund (RRIF) is a retirement income vehicle in Canada, designed to provide a steady income stream to retirees by converting savings from a Registered Retirement Savings Plan (RRSP) into taxable income. Here's how it works:

• Setting Up a RRIF

You can open a RRIF by transferring funds from your RRSP or certain other eligible plans (e.g., a Registered Pension Plan).

A RRIF must be set up by the end of the year in which you turn 71 (or earlier, if you choose). You cannot contribute directly to a RRIF; funds are transferred in from an RRSP or similar plan.

• Withdrawals

Once the RRIF is set up, you're required to withdraw a minimum amount every year. The minimum is based on a percentage of the RRIF's value as of January 1 each year and increases with age. For example:

• At age 71, the minimum withdrawal is 5.28%.
• At age 80, it's 6.58%.
• By age 95, it's 20% annually.

There’s no maximum withdrawal limit, so you can withdraw more than the minimum if needed, though all withdrawals are taxable.

• Taxes on Withdrawals

Withdrawals from a RRIF are considered taxable income and must be included in your annual tax return.

If you withdraw more than the minimum amount, withholding tax applies to the excess:

• 10% for amounts up to $5,000.
• 20% for amounts $5,001 to $15,000.
• 30% for amounts over $15,000 (outside of Quebec, which has different rates).

• Investments Within a RRIF

A RRIF can hold the same types of investments as an RRSP, such as stocks, bonds, mutual funds, GICs, and ETFs. Investments continue to grow tax-deferred within the RRIF until withdrawal.

• Flexibility

You have control over the timing and amount of withdrawals (beyond the minimum) and can adjust your investment strategy based on your needs.

Spousal RRIFs: If you transfer funds from a spousal RRSP, the RRIF remains under your name, but tax rules may apply to your spouse if recent contributions were made.

• End of a RRIF

The RRIF remains active until the balance is fully withdrawn or the account holder passes away. Upon death, remaining funds are typically transferred to a named beneficiary or the estate, with tax implications depending on the circumstances.

• Key Benefits of a RRIF:

• Continues to provide tax-sheltered growth.
• Offers flexibility in withdrawals beyond the mandatory minimum.
• Helps convert retirement savings into a predictable income stream.

To ensure your RRIF is maximizing your income and minimizing your tax, contact our office so we can review and advise you of the most efficient strategies.