The Registered Retirement Income Fund (RRIF) is a type of extension of the Registered Retirement Savings Plan (RRSP). Here’s what you need to know about it.
The RRIF is a vehicle for you to pay out the RRSPs that you contributed to during your working life. Withdrawing funds from the RRIF will supplement your retirement income, in addition to your state pensions (QPP, PSV) and your employer pensions, if any. Once you are in an RRIF, your savings will continue to generate tax-protected returns.
Contrary to popular belief, you can transfer your RRSPs to an RRIF at any time, even as young as 55. It will just change the way certain calculations are done when it comes to annual minimum withdrawals.
On the other hand, the financial planner André Lacasse of the service financier Lacasse specifies that it is mandatory to convert his RRSPs into RRIFs no later than December 31 of the year of his 71st birthday. Specifically, this means that the first withdrawal must be made and taxed in the year of your 72nd birthday.
Minimum Withdrawals
Many people only see an RRSP for the tax savings it generates when you’re still on the job. We forget that this is more of a tax deferral granted by the state. The latter will recover all or part of this “gift” at the time of withdrawal.
Therefore, once an RRSP is converted to an RRIF, a minimum withdrawal, calculated by age, must be made each year. For example, at age 71, you must withdraw 5.28% of the market value of the RRIF calculated at the beginning of the year. This percentage increases to 5.40% at the age of 72 and increases from year to year to reach the maximum of 20% at the age of 95 and over or earlier when the amounts are exhausted. Payouts begin in the year following the transfer.
Taxable Amounts
Of course, it is possible to withdraw more if you wish, but you must remember that any amounts taken out of the RRIF are added to your income and are taxable. But do we pay less tax when we leave the labor market because we have less income than when we were working? Not so sure, says André Lacasse.
“Pensioners have access to several beneficial tax credits and once their income increases, they risk losing all or part of them. Therefore, due to the marginal effective tax rate, you can no longer always say that our tax rate will be lower in retirement,” says the financial planner.
withholding tax
At the time of payout, a withholding tax is also automatically levied by the financial institution. But be careful because it can’t save you a tax bill.
“There may be a significant adjustment depending on the actual revenue received during the year. That’s why I recommend my customers to carry out an income simulation and, if necessary, to apply for an increase in withholding tax in order to avoid nasty surprises,” says André Lacasse.
traceability
Note that even if you have converted your RRSPs to RRIFs, you can still go back if you have not yet reached December 31st of the year of your 71st birthday. You could therefore transfer your RRIFs to RRSPs. You also don’t have to convert all of your RRSPs to RRIFs before the deadline, and you can work in installments to reduce the minimum withdrawal amount if it’s tax-friendly.
Annual or monthly payouts?
Is it better to withdraw money once a year or monthly? “Normally, we would like to see some stability in retirement incomes. Monthly payments can be more practical to better control your budget,” says André Lacasse. That consideration aside, there’s no real benefit in going with one formula or the other.
“Of course, if the stock market is going up over the year, it’s more profitable to make monthly withdrawals, but it’s the opposite when the stock market is going down. Since it is very difficult to predict how the market will behave, we will generally choose what is most practical for the person,” notes André Lacasse.
Advice
- RRIF withdrawals are eligible income for the Federal Retirement Income Credit, which may qualify for a 15% credit on the first $2,000.
- If your spouse is younger, you can use their age instead of your own to determine the minimum payout percentage. This reduces the amount to be withdrawn, which can be advantageous for tax purposes.
- It is possible to transfer an RRIF to the surviving spouse with no tax implications by mentioning it in their will.
Do you have any information about this story that you would like to share with us?
Do you have a scoop that might be of interest to our readers?
Write to us or call us directly at 1-800-63SCOOP.