Some Canadians are shocked when they realize that they must pay tax when they retire and start withdrawing money from their RRIF. However, it’s only fair. When you put funds into your RRSP you receive a tax deduction. And the investments grow tax-free over the years. So, when you start drawing down your funds and pay tax, you are really just facing the music. The good news is that your income may be reduced in retirement and you could be in a lower tax bracket – cutting your tax burden.
What is a Registered Retirement Income Fund (RRIF)?
During your savings years, you put cash into your Registered Retirement Savings Plan (RRSP). When you retire and want to start tapping the funds for your living expenses, you convert your RRSP into an RRIF.
An RRIF has some similarities to an RRSP. Both are investment vehicles, allowing you to hold stocks, mutual funds and interest-bearing certificates. These can grow tax-free within the RRIF.
However, there is one key difference. Once you convert your RRSP to a RRIF, you must begin making minimum annual withdrawals. Depending on your age, you have to withdraw a certain percentage of your RRIF.
A key rule is that you must convert your RRSP into a RRIF by Dec. 31 of the year that you turn 71. Of course, if you retire earlier than that you have the option to start a RRIF at any time.
RRIF Withdrawal Rules
The federal government has minimum withdrawal rules so that it can start collecting tax on your retirement savings.
These minimums vary widely depending on your age. You must start withdrawing funds at age 71, when the annual minimum is 5.28 percent. When you reach the age of 95, you must take out 20 percent of the funds.
Of course, you don’t have to wait until you are age 71 to withdraw funds. You can set up a RRIF at any time. The good news is that there is no minimum withdrawal until age 65. However, you can’t make contributions to a RRIF like you can an RRSP.
Let’s look at an example. Janet has operated her own website design company for many years. At age 55, she decides to retire to spend more time with her grandchildren and travel. She converts her RRSP into a RRIF and continues to make investments to grow her retirement fund. Since there are no minimum withdrawals at her age, she takes out money as needed for living expenses and trips. Once she turns 65, she will have to follow the minimum withdrawal rules.
What is the RRIF withdrawal tax?
The good news is that there is no withholding tax when you withdraw the minimum amount. However, when you take out additional funds you will face a withholding tax. This is the same as for an RRSP withdrawal – you will see a tax of 10 percent on up to $5,000, 20 percent on up to $15,000, and 30 percent on amounts above that.
There are no specific RRIF tax rates. Your RRIF withdrawals are counted as income. When you file your tax return you add up all of your sources of income. And then you calculate your deductions and subtract any tax withheld. You may end up paying more tax or receiving a refund.
RRIF minimum withdrawal table
|
Age
|
Minimum
|
|
65
|
4.00%
|
|
66
|
4.17%
|
|
67
|
4.35%
|
|
68
|
4.55%
|
|
69
|
4.76%
|
|
70
|
5.00%
|
|
71
|
5.28%
|
|
72
|
5.40%
|
|
73
|
5.53%
|
|
74
|
5.67%
|
|
75
|
5.62%
|
|
76
|
5.98%
|
|
77
|
6.17%
|
|
78
|
6.36%
|
|
79
|
6.58%
|
|
80
|
6.82%
|
|
81
|
7.08%
|
|
82
|
7.38%
|
|
83
|
7.71%
|
|
84
|
8.08%
|
|
85
|
8.51%
|
|
86
|
8.99%
|
|
87
|
9.55%
|
|
88
|
10.21%
|
|
89
|
10.99%
|
|
90
|
11.92%
|
|
91
|
13.06%
|
|
92
|
14.49%
|
|
93
|
16.34%
|
|
94
|
18.79%
|
|
95 plus
|
20.00%
|
RRIF withdrawal calculator
There are a number of online tools that help you to calculate how much money you will need to withdraw each year from your RRIF.
RRSP/RRIF Withdrawal Calculator
RRIF withdrawal strategies
When you retire, it’s important to have an overall financial strategy so that you have enough money for the rest of your life. Your RRIF is just one component of this plan. Some of the other factors are:
- Canada Pension Plan and Old Age Security: Some financial experts recommend that you delay taking these benefits until the age of 70. The reason: The federal government increases the amount you can receive every year up until that age. In order to postpone taking these benefits until age 70, you may wish to use funds from your RRIF or TFSA.
- TFSA: The best feature of a Tax Free Savings Account is that there is no tax when you withdraw money. Ever. Therefore, it can make sense to tap your TFSA first to avoid making taxable RRIF withdrawals.
- Non-registered funds: You may have investments outside your RRIF and TFSA. Of course, these are taxable.
- Pensions from the government, union or company: If you are lucky, you have a pension from your workplace. These can be an important element of your overall retirement finances.
If you take out the minimum from your RRIF and don’t need the cash for your living expenses, consider investing in your TFSA. This allows your investment to grow tax free.
Be careful to keep track of your overall annual income. If you take out too much money from your RRIF and have other sources of income, you can end up in a higher tax bracket. This may result in your paying more tax than expected.
What happens to an RRIF when you die?
It’s important to prepare for what happens to your RRIF when you die. If you name your spouse as the “successor annuitant” the payments will go to them automatically. The spouse can have the funds rolled over into their own RRIF (or RRSP if they haven’t converted to a RRIF yet).
If your beneficiary is a financially dependent child or grandchild, your RRIF funds can be transferred tax-free to their RRSP (or their Registered Disability Savings Plan if they have one).
If you die without a spouse, or a financially dependent child/grandchild, the RRIF is collapsed and the funds go to your estate. The estate will be required to pay tax on the entire amount – which can be substantial.
It’s vital to name a beneficiary of your RRIF. While you cannot avoid income tax, you can bypass having to pay probate fees upon death.
RRSP to RRIF rules
When you collapse your RRSP, you have three options:
- Take a lump sum: This is generally not recommended because you will be hit by a whopping tax bill.
- Purchase an annuity: This provides you with a guaranteed income stream for the rest of your life.
- Open a RRIF account: When you establish a RRIF, all of your investments are simply transferred from your RRSP.
Minimizing tax on your RRIF withdrawals
Your RRIF is a great tool to fund your retirement. Just remember that the money must last you the rest of your life; with many Canadians living into their 80s or 90s, that’s a long time! When planning your RRIF withdrawals, be sure to consider your overall tax situation. If possible, keep your income in a low tax bracket to minimize tax.
