Many Canadians understand the importance of putting money into savings, but there are far fewer conversations about what to do with your nest egg once you make the move into retirement. When it comes to converting savings into income, the most popular option for Canadians is the Registered Retirement Income Fund (RRIF).
What’s the difference between an RRSP and a RRIF?
A Registered Retirement Savings Plan (RRSP) is a government-approved investment plan that helps Canadians save for retirement. According to the most recent Stats Canada numbers, 6,003,990 Canadians contributed to RRSPs in 2018.
After loyally saving money in a tax-deferred RRSP for your entire career, it’s time to switch your mindset from savings to how to pay yourself in retirement. One option is to withdraw all the funds from your RRSP in one lump sum, but it would be wiser to convert the account to a Registered Retirement Investment Fund (RRIF).
Due to its similarity to an RRSP, a RRIF is a comfortable transition. It offers the advantage of tax-free growth, provides a high level of control of the investments in the plan (mutual funds, stocks, bonds, segregated funs, guaranteed investment certificates and more), and gives you flexibility in withdrawal amounts. You can set up a RRIF at any age (you don’t have to wait until 71), letting you defer tax while your money grows.
Simply put, an RRSP is how you save for retirement and a RRIF manages how the money is paid back to you. Learn more about our registered savings plans.
How RRIF withdrawals work
Even if you’re not ready to make withdrawals, you have to convert an RRSP to a RRIF by December 31 of the year you turn 71. RRIFs require minimum withdrawals based on age. At the beginning of each year, the Canadian Revenue Agency (CRA) applies a percentage factor corresponding to your age against the value of the assets in your RRIF to calculate your minimum withdrawals. There’s also an option to base the minimum withdrawals on the age of a spouse or partner, but you need to choose this option when you first open the RRIF.
If you decide to retire before 71 and need periodic income, rather than on a monthly or consistent basis, it may be a good idea to leave your savings in an RRSP and make an occasional withdrawal. A financial professional can assess your situation and empower you to make informed decisions about which accounts to draw money from and when. Our Retirement Income Fund Calculator can help you determine what your minimum RRIF withdrawal amount will be once you retire, how long your RRIF will last as a source of retirement income, and what your payment options will be.
Taxes and RRIFs
Keep in mind that RRIF payments are considered taxable income in the year they’re withdrawn. For tax purposes, payments are added to your “other income.” It’s important to name a beneficiary. If you do, the remaining funds in your account can be excluded when the probate fee of your estate is calculated. You can also name a spouse as the “successor annuitant.” By doing so, RRIF payments will continue to be paid to the surviving partner and can minimize estate administration fees and taxes.
Here are a few tips on reducing taxes:
- Don’t take early payments or bigger payments than you need, because it could put you in a higher marginal tax bracket. This extra income could also drain your RRIF too quickly.
- If you don’t need the full minimum payment at age 71, consider putting it into a Tax-Free Savings Account (TFSA). You can continue to grow your savings and investments tax-free.
- Look into income-splitting with other eligible pension income to potentially reduce the overall tax bill for you and your partner.
- Eligibility for certain income-tested benefits from the government can be impacted by your taxable income, such as Old Age Security (OSA). Additional income can result in a clawback or having government benefits reduced.
Get expert advice on converting an RRSP to a RRIF
We want to ensure that the investments you choose will give you the retirement you’ve always envisioned. Our goal is to work with you in the years leading up to your retirement, so we can help you consider all your expenses and income streams. Contact us online or email us to understand your retirement planning options — no matter where you are in your journey.
Island Savings Wealth Management is a division of FW Wealth Management Ltd. which is a wholly owned subsidiary of First West Credit Union. FW Wealth Management Ltd. is a licensed life insurance agency offering financial planning, life insurance and investments. Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Financial planning services are available only from advisors who hold financial planning accreditation from applicable regulatory authorities.