RRIFs
These accounts allow you to generate income during retirement.
A Registered Retirement Income Fund (RRIF) is an account registered with the Canada Revenue Agency (CRA) designed to provide you with a stream of income during your retirement. It allows your investments to continue growing tax-free until they are withdrawn.
Opening a RRIF
If you choose to turn your Registered Retirement Savings Plan (RRSP) into retirement income, one option is to convert your RRSP into a RRIF. This transition allows the RRIF investments you select to keep growing while deferring taxes on interest, capital gains, dividends, and other distributions.
When opening a RRIF:
- Understand what types of investments you can purchase through the account (e.g. mutual funds, ETFs, stocks, bonds).
- Understand if you will have access to other companies’ investment products or only to investment products sold by the company that created your account.
- Compare fees and charges related to the investments you purchase in your account. Examples of fees to consider include trading fees, advisory fees, withdrawal fees, account transfer fees, administration fees, and foreign exchange fees.
- If you do not feel confident investing on your own, or if you do not have time to properly research potential investments, then consider working with a registered investment advisor to align your investments with your financial goals.
- If you feel confident investing on your own and are willing to put in the time to properly research potential investments, then consider a self-directed RRIF. Self-directed accounts may provide access to a broader range of potential investments and at lower cost.
No RRIF Contributions
Unlike an RRSP, you cannot contribute to a RRIF. The purpose of a RRIF is to distribute the savings accumulated in your RRSP to provide you with income during retirement. You can still invest your RRIF savings, but typically conservative investment products are most suitable for RRIFs given retirees’ shorter time horizons.
Withdrawing Funds
One key feature of a RRIF is the mandatory minimum withdrawal requirement, which increases as you get older. At the beginning of each year, your financial institution will calculate the minimum amount you must withdraw, based on CRA regulations.
All withdrawals are taxable as income in the year of withdrawal, so careful planning is essential.
Closing or Transferring a RRIF
If you wish to move your funds to a life annuity (i.e. an insurance policy) to receive a guaranteed annual income, you can transfer them. However, once transferred, you are generally locked in when you move the funds to an annuity.
When the RRIF holder dies, the remaining funds can pass to their spouse, a common-law partner, or a dependent, with options for tax-efficient transfers to other registered accounts, such as a spouse’s RRIF or Registered Disability Savings Plan (RDSP).
Advantages of a RRIF
RRIFs offer key benefits, including:- Tax-deferred growth: Your investments continue to grow tax-free until withdrawn, maximizing the potential for compounding.
- Retirement income flexibility: You can choose how much to withdraw above the minimum, giving you control over your income.
- Estate planning benefits: Upon your passing, RRIF funds can be transferred to a spouse, common-law partner, or dependent, with options for further tax deferral in certain accounts.
Disadvantages of a RRIF
While RRIFs offer significant advantages, they also come with some drawbacks to consider:- Mandatory withdrawals: The required annual minimum withdrawal increases over time, potentially pushing some of your income into a higher tax bracket.
- Tax on withdrawals: Unlike TFSA withdrawals, which are not taxable, all RRIF withdrawals are fully taxable. Further, all RRIF income is taxed as income, not as capital gains or dividends in a taxable investment account.
- No RRIF contributions: You cannot add more funds to a RRIF after it is set up.
When is it Optimal to Use a RRIF?
- You transition from saving to income generation: Typically, this happens when you retire. Note that you must empty, or convert your RRSP to a RRIF or annuity, by the end of the year you turn 71.
- Your income needs vary: If you require flexibility to manage withdrawals while minimizing tax implications, a RRIF offers more options than an annuity.
- You want to defer taxes: If you have enough other retirement income, by minimizing RRIF withdrawals, you can reduce your annual taxable income and reduce your overall tax burden over your lifetime.