What is a RRIF?

Like many Canadians, you’ve been working hard to put money into your RRSP: A recent study showed that 43% of Canadians with an RRSP are doing so to save enough money to get by in retirement, while 40% want to save enough for their ideal retirement lifestyle. ^{footnote 11} But now that you’re approaching retirement, what happens next? Did you know you have to close your RRSP before the end of the year in which you turn 71? If you simply withdraw the funds, you’ll have to pay tax on them. Fortunately, there’s another option. You can defer the taxes by converting your RRSP into a Registered Retirement Income Fund (RRIF).

You’ve probably got some questions about RRIFs, so here’s some basic information to get you started.

What is a RRIF?

Your RRIF is a source of retirement income. In many ways, it’s like an extension of your RRSP: Your account is registered with the federal government, your money can continue to grow, tax-free, and your money is only taxed when you withdraw it.

When should you open your RRIF?

You can open your RRIF at any time, as long as you do so by December 31^st in the year you turn 71. Because you must start taking withdrawals from your RRIF the year after you open it, you shouldn’t open it before you’re ready to retire.

How do withdrawals work?

You must take out a minimum amount every year from your RRIF, and you must make the required minimum withdrawal annually until the account is empty. You can choose to withdraw more than the minimum amount, but you’ll have to pay withholding tax on the extra funds.

The exception to this is the first year your RRIF is opened, which has no required minimum withdrawal amount. Any amount you withdraw during the year your RRIF is opened will be subject to withholding taxes.

TIP: If you don’t need money from your RRIF right away, you can also put the minimum amount you must withdraw back to work for you. Unlike your RRSP, there’s no age limit for having a TFSA. So as long as you have available contribution room in your TFSA, putting your required withdrawal amount into an account where it can continue to grow, tax-free, is always an option.

How are required withdrawals calculated?

The minimum required withdrawal amount is set by the government, and your financial institution will let you know what your minimum amount is. It’s a percentage of your total account, based on your age when you opened the account, and the percentage goes up every year.

The required minimum withdrawal amounts are intended to exhaust your RRIF by the end of your life. But if your investments perform well, your RRIF will continue to grow in value, despite the minimum withdrawals that you make. For example, currently the minimum withdrawal amount for people aged 65 is 4%. But if your investment returns are 6%, the total value of your RRIF will rise by 2%.

If your spouse or partner is younger than you, one way to make your required minimum withdrawal amounts smaller is to base them on your partner’s age, rather than your own. It’s always a good idea to check with your financial planner before making this decision, because you can’t change your mind once the account is opened.