A Registered Retirement Income Fund (RRIF) is a tax-deferred retirement plan—and an essential endgame for your registered retirement savings plan (RRSP). These accounts work in tandem to allow you to build tax-sheltered retirement savings during your working years and have a stream of income during your retirement.
Once you’ve retired, you transfer your retirement savings from your RRSP to your RRIF. From there, based on calculations determined by the federal government, you’ll get annual payments based on a percentage, determined by you or your spouse’s age, your retirement years and the value of your RRIF as a whole. Like an RRSP, an RRIF is registered with the federal government and is considered a federal product.
How does an RRIF work?
By federal law, an RRSP has to be converted to a RRIF. While Canadians can convert their RRSP to a RRIF at any point when they retire, it is mandatory that RRSPs must be converted by December 31st of the year the owner turns 71.
If the owner doesn’t make the conversion, the money in the RRSP will be listed as income on your taxes—and you may have to pay taxes on the full amount in the account. If you have a significant amount of money in there, that could mean a hefty tax bill. Thus, by having an RRIF and taking annual predetermined payments, you pay less tax—depending on your annual income and marginal tax rates.
Converting an RRSP to an RRIF is easy, either let your financial institution know that you want to convert it or they will notify you.
Funding your RRIF can be done in different ways. You can transfer money from your RRSP but you can also fund it from your:
- Pooled Registered Pension Plan (PRPP)
- Deferred Profit-Sharing Plan (DPSP) provided by your employer
- Spouse or partner’s RRSP or RRIF, upon separation or if they have died
- Spouse or partner’s own DPSP if they have died
- Another RRIF
Even though an RRIF is primarily a vehicle for paying out the proceeds of your RRSP and other sources of retirement savings, it is still an investment vehicle. That said, an RRIF can hold investments such as:
- Stocks
- Bonds
- ETFs
- GICs
- Mutual funds
- Segregated funds
These investments continue to grow tax-free while in the RRIF, so retirees will have enough money to last their lifetime.
What’s the difference between an RRIF and an RRSP?
An RRSP is used to save and invest your money towards your retirement, while a RRIF lets you withdraw those savings and investments when you retire (or by the end of the year in which you turn 71). Simply put, an RRSP is used to build your savings up and an RRIF is used to dole them out.
With an RRSP, your savings grow tax-free and you get a yearly tax deduction based on your contributions. However, with a RRIF, you can no longer make contributions, but your money and assets remain tax-sheltered until you withdraw them.
There’s no maximum withdrawal amount. However, keep in mind that not only will you have to pay the tax on the minimum withdrawal amount, you’ll also have to pay a withholding tax on any excess amount. Your financial institution will take the amount and pay it to the government.
Withholding tax rates
| Amount in excess of the minimum amount | Withholding tax rate (except in Quebec) |
|---|---|
| Up to $5,000 | 10% |
| Between $5,000 and $15,000 | 20% |
| More than $15,000 | 30% |
What are the benefits of an RRIF?
The obvious one is the tax sheltering of your investments but there are other advantages.
- All your investments continue to grow in your RRIF after you transfer them from your RRSP. You only pay taxes on what you withdraw each year. If you take your full RRSP investment in one lump sum on withdrawal, you risk paying a lot of taxes on it because you may be in a higher marginal tax rate. For example, let’s say you’re 71 and you’re still working. If you decide to take that lump sum, you’ll be in a higher tax rate because you have income. If you’re retired, your marginal tax rate will be based on your minimum RRIF withdrawals, which should be lower.
- It gives you a regular income stream because you can withdraw annually, semi-annually, quarterly or monthly, depending on how you like to manage your cash flow.
- Income from your RRIF qualifies you for up to $2,000 towards the Pension Income Credit.
If you have a spouse or partner, there are additional benefits too:
- You can use your spouse’s age to calculate the minimum amount coming out of your RRIF. This is important because, if your spouse is younger than you, that means a lower minimum amount, which means fewer taxes paid on the withdrawals.
- You can split your income with your partner, as income from your RRIF is considered pension income.
- You can leave your RRIF to your spouse tax-free. Plus, since registered accounts aren’t considered part of your estate, they won’t be affected by probate fees.
What’s the difference between an RRIF and an annuity?
First, let’s define a RRIF and an annuity. An RRIF a retirement fund that holds investments and money while an annuity is an insurance policy that guarantees to pay out a set amount of money annually over an agreed upon period of time.
They are two different products that serve the same purpose: to provide a steady stream of income during your retirement. However, each one has its own pros and cons.
One of the main pros of an RRIF is that it can hold investments, but one of its cons is that means it is subject to the market conditions, depending on the risk in your portfolio. On the other hand, an annuity provides a guaranteed income but you have little control over it. You do have to pay taxes on both products.
However, as the products are different, there’s no reason why you can’t have both an RRIF and an annuity. You can consider putting some of your RRSP into a RRIF and using the rest to buy an annuity.
What’s the Minimum Withdrawal Limit for an RRIF?
As mentioned, the minimum amount retirees have to withdraw on an annual basis is a percentage based on age, combined with the value of your RRIF. These minimums are set by the federal government and the amount increases as you get older. The calculations are made up to beyond 95 years of age.
They were updated in the 2015 federal budget to let Canadians keep more money in their RRIFs, which could continue to grow tax-free. Making the calculations to 95 and beyond is also an acknowledgement that people are living longer, into their 80s on average, and needed their money to last.
The current formula is 1/(90- your age as of January 1 of the current year). Other factors that make up the calculations include an assumption of a 5% nominal rate of return and 2% indexing based on long-term historical rates of return on a portfolio of investments and historical expected inflation. The minimums were reduced as seen in the chart below.
Minimum amounts to be withdrawn from a RRIF:
| Age (at start of year) | Existing Factor up to 2014% | New Factor as of 2015% |
|---|---|---|
| 71 | 7.38 | 5.28 |
| 72 | 7.48 | 5.40 |
| 73 | 7.59 | 5.53 |
| 74 | 7.71 | 5.67 |
| 75 | 7.85 | 5.82 |
| 76 | 7.99 | 5.98 |
| 77 | 8.15 | 6.17 |
| 78 | 8.33 | 6.36 |
| 79 | 8.53 | 6.58 |
| 80 | 8.75 | 6.82 |
| 81 | 8.99 | 7.08 |
| 82 | 9.27 | 7.38 |
| 83 | 9.58 | 7.71 |
| 84 | 9.93 | 8.08 |
| 85 | 10.33 | 8.51 |
| 86 | 10.79 | 8.99 |
| 87 | 11.33 | 9.55 |
| 88 | 11.96 | 10.21 |
| 89 | 12.71 | 10.99 |
| 90 | 13.62 | 11.92 |
| 91 | 14.73 | 13.06 |
| 92 | 16.12 | 14.49 |
| 93 | 17.92 | 16.34 |
| 94 | 20.00 | 18.79 |
| 95 & over. This percentage is set until you use all of your RRSP | 20.00 | 20.00 |
While these are the set amounts, exceptions have occurred. In 2020, the federal government temporarily reduced the minimum annual withdrawal by 25% due to the pandemic, which was causing market turmoil.
A RRIF is one option to provide yourself with income during your golden years, if it makes sense for your financial situation. As with any financial product, make sure you can leverage the benefits so you have enough money to ensure you have a comfortable retirement.
