How Registered Retirement Income Funds (RRIF) Work
RRIF, or Registered Retirement Income Fund, has been an acronym that has been thrown around in quite a few posts around here without explaining them fully. This article will get into the basics on how RRIF’s work and their general purpose.
What is an RRIF?
As mentioned above, RRIF stands for Registered Retirement Income Fund and it’s one of the options that RRSP account holders face once they turn 71. Why 71? That’s when RRSP accounts are forced to close.
At that point, the RRSP holder has 3 choices (or a combination of the 3):
- Withdraw everything as cash. This is not a great idea if there is a large balance as the tax hit would be huge.
- Convert the RRSP into an annuity. This will allow the RRSP holder to receive a set monthly payment, usually until death, in exchange for the RRSP balance.
- Convert the RRSP into an RRIF. This will allow the investments to continue to grow tax free, but will face an increasing forced withdrawal schedule as the account holder gets older.
It is important to note that RRSP’s can be converted to an RRIF before the age of 71 (as early as 55).
The Withdrawal Schedule
The rule is before the age of 71, you are forced to withdraw a min of 1/(90-age) %.
Here is the table 71 years and older (borrowed from govt website):
|Age||Withdraw %||Age||Withdraw %|
|72||7.48 %||84||9.93 %|
|73||7.59 %||85||10.33 %|
|74||7.71 %||86||10.79 %|
|75||7.85 %||87||11.33 %|
|76||7.99 %||88||11.96 %|
|77||8.15 %||89||12.71 %|
|78||8.33 %||90||13.62 %|
|79||8.53 %||91||14.73 %|
|80||8.75 %||92||16.12 %|
|81||8.99 %||93||17.92 %|
|82||9.27 %||94 and older||20 %|
Tips and Strategies
- Use the Younger Spouse: One trick that a lot of advisors will advocate is using the spouses age when determining the RRIF withdrawal schedule. This can work especially well if there is a large age difference between spouses.
- RRIF Meltdown: This is very similar to the RRSP meltdown that I’ve written about before, except now, the RRIF withdrawals are used to service the investment loan. The meltdown basically converts the registered investments into non-registered investments tax free.
- Tax Credits: Assuming no other pension income, at the age of 65, up to $2,000 can be withdrawn from an RRIF tax free.
- Income Splitting: Since RRIF withdrawals are considered pension income, this means that RRIF income is eligible for income splitting with the spouse. This may result in lower overall family taxation providing the other spouse has lower income.
Altogether, the RRIF is a handy tool when the RRSP is forced to close. Even though there is a set withdrawal schedule, there are a few strategies that can be used to minimize the tax hit.