Registered Retirement Income Funds 101
How and when to draw retirement income from your RRIF.
As a Canadian investor, you know about Registered Retirement Savings Plans (RRSP). You use an RRSP to save for your retirement because it comes with two big benefits: your annual contributions can be deducted from your income and your investment growth is tax-deferred until you start to withdraw your money, usually for retirement.
While you can withdraw directly from your RRSP, most people choose not to because of potentially prohibitive withholding taxes. The typical approach is to convert your RRSP to a Registered Retirement Income Fund (RRIF) or an annuity, and you withdraw taxable income from those plans. I find some investors aren’t as familiar with RRIFs as they are with RRSPs. Here’s what you need to know.
You open a RRIF by transferring money from your RRSP. Your RRIF can generally hold all of the same investments you held in your RRSP. Like an RRSP, any investment income grows on a tax-deferred basis until it is withdrawn from your RRIF.
Key dates to know
While you can convert your RRSP to a RRIF at any time, the government requires that you make the switch by the end of the year in which you turn 71.
You can start withdrawing income from your RRIF as soon as the account is set up. You may choose to wait a while, but you’ll have to start making annual minimum withdrawals by December 31 of the year following the year the RRIF was created. You’ll have to keep making annual minimum withdrawals every year after that.
So, if you opened a RRIF in January 2017, you’ll have to make your first withdrawal on or before December 31, 2018.
Annual minimum withdrawals
The Canada Revenue Agency (CRA) determines the minimum amount you need to withdraw each year. It’s calculated by multiplying the market value of your RRIF on December 31 of the previous year by a set percentage, and that percentage increases as you get older.1
If your spouse is younger than you, you can base your annual minimum withdrawals on their age instead of yours. This strategy can work for you if you have other sources of income and want to leave money in your RRIF as long as possible.
RRIFs and taxes
Your RRIF provides a steady and predictable stream of taxable income. That means you’ll pay income tax on any amount you withdraw.
Also, if you withdraw more than the minimum withdrawal amount, which may be necessary to cover your retirement expenses, you’ll pay a withholding tax on the portion of the withdrawal that exceeds the minimum amount. Rates for withholding tax vary by province, so ask me about the rate you would need to pay.
Call our office today to talk about converting your RRSP into a RRIF and about managing your retirement income.