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 % |
| 71 | 7.38% | 83 | 9.58 % |
| 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- Tax Credits: Assuming no other pension income, at the age of 65, up to $2,000 can be withdrawn from an RRIF tax free.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.
11 Comments, Comment or Ping
1. George
One thing you don’t note about the 3 “choices” is that they aren’t mutually exclusive – at or before age 71, somebody with an RRSP can choose to take out some cash, convert some of the RRSP to an annuity, and to convert the rest to a RRIF.
Put another way, you aren’t forced to go with only one of those options – you can combine them in any way that you like, as long as the RRSP is collapsed by age 71.
Dec 29th, 2008 @ 9:33 am
2. FrugalTrader
Good call George, I will fix the article to reflect your suggestion. Thanks!
Dec 29th, 2008 @ 10:19 am
3. Four Pillars
Good explanation of RRIFs! I’ve been meaning to post on these as well (someday!).
A couple of minor points
- RRSPs have to be collapsed by the end of the year you turn 71 – not by your birthday.
- There is no mandatory withdrawal in the first year you set up the rrif. If you convert your rrsp to a rrif in the year you turn 71 then the first mandatory withdrawal will be in the year you turn 72.
Dec 29th, 2008 @ 12:37 pm
4. Jack
Don’t forget that the Pension Credit is a 15% credit so it will only make a pension withdrawl “tax free” if you’re only in the lowest tax bracket. Also, the pension credit can be transfered from one spouse to another. So if S1 has $3,500 of pension income eligible for splitting then they can transfer up to half to S2. At the moment, both spouses are using 1750 of each of their pension credits. If S1 also has $500 of pension income NOT eligible for splitting (ie. RPP payments) then S2 can transfer their remaining 250 of credits to S1 thereby (possibly) wiping out tax payable on their pension income.
Dec 29th, 2008 @ 2:59 pm
5. Jack
oops… I should have said SOME RPP payments aren’t eligible for pension splitting (variable pension benefits paid from a money purchase provision of an RPP).
A better example of pension splitting would be if S1 had transfered say 14000 of pension income to S2 and S2 had had no other income. S2’s basic personal and age credit (for 65+) would have wiped out tax payable on the 14000 transfered and he/she wouldn’t have needed their pension credit at all. Then the entire pension credit from S2 could be transfered to S1 (giving S1 a 4000 pension credit).
Dec 29th, 2008 @ 3:14 pm
6. FrugalTrader
Thanks again for the tips guys.
Dec 29th, 2008 @ 8:22 pm
8. cannon_fodder
I hope that the government at some point before I retire, allows for periods of poor performance by permitting the deference of the prescribed withdrawal amount.
For example, if you are supposed to withdraw 10%, you are permitted to withdraw less but that difference is to be made up within 2 years.
Ideally, I’d like my RRSP to fund the first leg of my retirement and then TFSA and non-reg investments the last leg. Then I have more independence in how I retire.
Jan 6th, 2009 @ 1:22 am
10. cannon_fodder
FT,
Looks like annuities would be a good topic for a future article. It would be interesting to compare what annuities net you now, at historically low interest rates, to just a few years ago and compare that with inflation.
I understand there are different types of annuities – an expert’s explanation would be welcome.
May 26th, 2009 @ 11:21 am
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