Retirement marks a time to reap the rewards of decades of hard work, and for many Canadians, a key part of that journey involves converting their Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund (RRIF).
RRIFs allow Canadians to continue investing their retirement savings while drawing a regular income but understanding the ins and outs of this retirement income tool is essential to making the most of it.
What is an RRIF?
A Registered Retirement Income Fund (RRIF) is a government-registered account that Canadians can use to manage and withdraw retirement income. Like an RRSP, an RRIF offers tax-deferred growth, allowing investments to grow without immediate tax implications. However, while RRSPs are designed to accumulate retirement savings, RRIFs are designed for decumulation — meaning you are required to make regular, minimum withdrawals.
Once funds are transferred into an RRIF, you can no longer make additional contributions, but you can continue investing the assets within the RRIF in various investment vehicles such as mutual funds, ETFs, stocks, bonds, and more.
Transitioning from RRSP to RRIF: Timing and Steps
Canadians must convert their RRSPs into an RRIF (or other retirement income options, such as an annuity) by the end of the year in which they turn 71.
There are several important steps to make this transition smooth:
- Transfer RRSP Assets to an RRIF: This transfer is tax-free, and the funds remain within the tax-sheltered environment.
- Determine Withdrawal Strategy: Upon conversion, you’re required to withdraw a minimum amount each year based on your age or, if beneficial, your younger spouse’s age. You may withdraw more than the minimum, but additional withdrawals are fully taxable as income.
- Select Investments: Even after converting to an RRIF, you can keep your investments actively managed and diversified to continue generating returns and combat inflation over the years.
Understanding RRIF Withdrawals and Minimums
The most unique and potentially complex aspect of an RRIF is the minimum annual withdrawal requirement, which is calculated based on a percentage of your account balance at the beginning of each year. The percentage increases as you age, starting at 5.28% at age 71 and gradually rising each year. It gets up to 20% by age 95. This means that as you age, the RRIF minimum withdrawal rate increases, potentially impacting your tax bracket and overall income.
Taxes on RRIF Withdrawals
Since RRIF withdrawals are considered taxable income, it’s essential to plan around potential tax implications. Withdrawals may affect your eligibility for Old Age Security (OAS) and other government benefits, as income above certain thresholds may trigger an OAS claw back.
Additionally, large RRIF withdrawals could push you into a higher tax bracket, eroding some of your retirement income.
To manage your tax liability, consider strategies like:
- Income Splitting: If your spouse is in a lower tax bracket, you may allocate up to 50% of your RRIF income to them, lowering the household tax burden.
- Managing the Timing of Withdrawals: If you need more than the minimum in a given year, taking extra withdrawals strategically could help keep taxes in check.
RRIF Withdrawal Strategies
To get the most out of your RRIF, consider these key strategies:
- Set an Income Goal: Decide how much annual income you need to meet your retirement expenses, considering other sources of income, such as pensions and government benefits.
- Minimize Early Withdrawals: Taking out more than the minimum early on may cause your RRIF balance to deplete faster than planned. Be cautious with larger withdrawals in the early years to ensure the longevity of your retirement savings.
- Use a Younger Spouse’s Age for Minimums: If you have a younger spouse, you may base the RRIF minimum withdrawal rate on their age. This approach lowers your required minimum withdrawals, helping you preserve more of your assets for future growth and deferring taxable income.
- Investment Diversification: Continue to invest within your RRIF, but balance growth-oriented assets (like stocks) with income-generating, lower-risk investments (like bonds or dividend-paying stocks). This balance can help provide stability while still growing your assets to support future income.
- Consider the RRIF Lifecycle: Start with more growth-oriented investments in the earlier years of your RRIF, shifting gradually toward safer, income-producing assets as you age and your withdrawal rate increases.
RRIF Alternatives and Other Considerations
A RRIF is not the only way to generate retirement income from your RRSP savings.
Other options include:
- Annuities: Converting a portion of your RRSP into an annuity provides guaranteed, predictable income for life, though it may offer less flexibility than a RRIF. Many retirees choose a combination of an RRIF for flexibility and an annuity for stability.
- Deferred Income Plans: For individuals aged 65 or older, transferring RRIF funds to a Deferred Life Annuity or using certain other strategies may offer a way to further defer tax payments.
Finally, it’s essential to remember that RRIF balances do not pass on tax-free to beneficiaries (other than a spouse). When you pass away, the RRIF’s balance is added to your estate’s income, potentially creating a large tax bill. To reduce this, some people designate their spouse as a successor holder of the RRIF, allowing the funds to roll over tax-free to the spouse’s RRIF.
The Bottom Line
An RRIF is an effective way to turn your RRSP savings into regular retirement income, providing flexibility and continued growth potential. By carefully planning your RRIF withdrawals, choosing an investment strategy suited to your goals, and considering the tax implications, you can maximize the benefits of your RRIF while preserving income for the years ahead.
Every individual’s retirement needs and financial situations are unique. A financial planner can help tailor an RRIF strategy that aligns with your retirement lifestyle, helping you enjoy a fulfilling and financially stable retirement.
