Understanding how RRIFs work in Canada

After decades of contributing to your RRSP, retirement brings a new question: how do you turn those savings into a steady stream of income? While RRSPs will take you to retirement, RRIFs allow you to draw on those savings while continuing to grow your nest egg.

Understanding how RRIFs work can help you plan your withdrawals, avoid surprises at tax time and feel more confident throughout your golden years. Here’s everything you need to know about RRIFs and how to make the most of your retirement income.

What’s a RRIF?

A RRIF is a tax-sheltered investment account designed to provide you with income during your retirement. Unlike RRSPs, you can’t make contributions to the account; it’s generally funded through direct transfers from eligible registered plans. However, the money invested in your RRIF can continue to grow tax-deferred in the account. You’re also required to make mandatory annual withdrawals starting in the year after you open your account.

How can you invest in a RRIF?

You can hold a variety of investments in your RRIF tailored to your risk tolerance and time horizon. Depending on your age, spending needs and other sources of income, some of your money may need to support you for decades. It’s important to balance accessibility for near-term payments and growth potential to help your savings keep pace with inflation over a long retirement.

Mutual funds and exchange-traded funds (ETFs) are popular investment options because they can provide diversification across asset classes, sectors and geographies through a single investment. A financial advisor can help ensure your investments align with your overall retirement plan. 

How do RRIF withdrawals work?

You’re required to withdraw a minimum percentage from your plan each calendar year. This percentage is based on your age at the beginning of the year and your total portfolio balance on December 31 of the previous year.

The younger you are when you open a RRIF, the lower your minimum percentage payout. As you age, the mandatory withdrawal percentage gradually increases. This can raise your taxable income and affect how long your savings can stay invested. For anyone under the age of 71, the percentage is calculated using the following formula: 1 divided by (90 minus your age).

For example, if your RRIF is worth $500,000 when you turn 71 and your minimum withdrawal rate is 5.28%, you’d be required to take out $26,400. You could receive that amount monthly, quarterly or as a lump sum payment, depending on the payment options offered by your financial institution. 

A mandatory withdrawal doesn’t mean you have to spend the money. If your RRIF payment is more than you need for living expenses, you may be able to save or reinvest the after-tax amount. For example, if you have available contribution room, you could consider contributing some of the funds to a Tax-Free Savings Account (TFSA), where future income and withdrawals are tax-free.

What are the RRIF withholding tax rates?

A withholding tax applies to RRIF withdrawal amounts that exceed your annual required minimum. This is deducted directly from your account by your financial institution and is a prepayment toward your income tax bill. Although you won’t face withholding tax on your mandatory minimum withdrawal amounts at the time of payout, all withdrawals count as taxable income in the year they were withdrawn. Withdrawals will be taxed at your marginal tax rate. 

When can you set up a RRIF?

You can open a RRIF at any age, but you must close your RRSP and convert it to a RRIF by December 31 of the year you turn 71. If you’re approaching 71, this deadline can affect your year-end planning. It’s important to review your options and discuss your withdrawal strategy with your financial advisor in advance.

Although you have to start taking funds out of your account once you open it, there are several reasons why you might want to convert to a RRIF before age 71:

• If you’re retiring early, you may need access to your retirement savings sooner.
• If you’re anticipating other sources of income in retirement that would push you into a higher tax bracket, such as a workplace pension, you may choose to start withdrawing funds now to reduce your tax burden later.
• You might choose to start making withdrawals early to reduce your annual withdrawal amount later, so you can still qualify for Old Age Security (OAS).
• Once you turn 65, you can elect to split up to 50% of eligible pension income with your spouse or common-law partner, which can help reduce your overall household tax bill.

Tips to maximize your RRIF

Everyone’s retirement can look different, which means there’s no one-size-fits-all approach to using a RRIF. However, there are several strategies that can help you manage your income more effectively, reduce unnecessary taxes and keep more of your money working for you:

• Align payments with your cash flow: You can ask your financial institution to adjust your RRIF payments so they arrive weekly, bi-weekly, monthly, quarterly or annually, depending on your cash-flow needs.
• Coordinate income sources: It’s important to consider your RRIF alongside other sources of retirement income. Because OAS benefits are income-dependent, if you withdraw too much from your RRIF you could receive a lower benefit payout. Adjusting your total annual withdrawal, or opening your RRIF before you retire, may prevent OAS claw backs.
• Designate a successor annuitant/beneficiary: Naming your spouse or common-law partner as the successor annuitant for your RRIF allows your funds to transfer to them without probate or estate taxes, should you pass away. You can also name a dependent child/grandchild as a beneficiary, and they may be able to inherit the account on a tax-deferred basis. (A dependent child or grandchild cannot be named a successor annuitant; only a spouse or common-law partner can be. However, a dependent child or grandchild, spouse or common-law partner can be named a beneficiary.)
• Consider using your spouse’s age: If your spouse or common-law partner is younger, you can elect to use their age to calculate your RRIF minimum withdrawals. This can help lower the amount you’re required to withdraw each year, potentially reducing your annual taxable income and helping you keep more money invested.
• Choose the right investments: Investing too conservatively may reduce your growth potential over a long retirement, while taking too much risk could affect your income stability. It’s important to work with your financial advisor to find a balance between growth and your risk tolerance.

The bottom line

Deciding when to open a RRIF, how much to withdraw and how to invest the remaining balance can impact both the income you receive today and the savings available later. Working with a financial advisor can help you navigate these considerations and build a plan tailored to your retirement goals.

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