This month, we interview one of our Portfolio Managers and resident Certified Financial Planner (CFP), Maria Dawes, to get her thoughts on the Registered Retirement Income Fund (RRIF).
What is a RRIF and how exactly does it work?
Throughout our working lives, Canadians can save for retirement by contributing to a Registered Retirement Savings Plan (RRSP). The government promotes this saving method by allowing the contributions to be tax deductible, and for the growth in the account to be non-taxable. When the save turns 71, the RRSP must be converted to a Registered Retirement Income Fund (RRIF), and the following year they must begin to withdraw a prescribed, minimum annual payment. In this way, anyone can create their own pension fund that pays them income throughout their retirement years.
How much and when will I begin to receive retirement income from my RRSP or RRIF?
The minimum RRIF amount must be withdrawn in the year after the RRSP is converted to a RRIF. This minimum withdrawal amount is based on the end-of-year value of your RRIF, as well as a prescribed percentage based on your age, or your spouses age. The prescribed schedule begins with a conservative withdrawal rate which becomes more aggressive over time. Obviously, taking a larger percentage out of a shrinking RRIF leads to a quicker depletion rate.
Through regular contributions to an RRSP, anyone can create their own pension fund that pays them income throughout their retirement years.
The minimum payment can be received in one lump sum at the start or end of the year or disbursed throughout the year with periodic payments. The frequency of a payment is entirely up to the RRIF holder. In addition, if the mney is not needed for living expenses, you can choose to contribute the withdrawals to a TFSA if you have contribution room, or to a non-registered investment account.
What is the tax treatment of RRIF withdrawals?
RRIF withdrawals will be deemed pension income in the year of the withdrawal and taxed at the RRIF holder's marginal tax rate. It is important to note that starting at age 65, pension income can be split with a spouse and is eligible for the pension credit. Because of the preferential treatment of pension income, it is advantageous at age 65 or later to withdraw from an RRIF instead of an RRSP (withdrawals from an RRSP are deemed income, not pension income.)
What if I want to take out more than the minimum withdrawal?
There is no maximum withdrawal amount. Just remember that all RRSP or RRIF withdrawals are taxable and depending on the amount withdrawn, the financial institution may withhold taxes up to 30%.
What if I need to access my RRSP savings before age 72?
Technically, the RRSP can be converted to a RRIF at any age. Conversion is only mandatory at age 71, and minimum withdrawals are made at age 72. However, once converted, the RRIF must pay out a minimum withdrawal each year and it cannot be changed back into an RRSP. For those looking to make a one-time withdrawal, my recommendation is for those younger than age 65 to take the funds from their RRSP directly. For those age 65 or older, open a RRIF account and only rollover the portion that you wish to withdraw. The RRIF withdrawal can be deemed pension income and your remaining RRSP will remain intact until mandatory rollover.
What if I don't want a large RRIF payment?
In some cases, people may not want a large RRIF payment. If one spouse is younger than the other, it is possible to elect the minimum withdrawal amount based on the younger spouse's age. This is especially advantageous if the pensioner is still earning employment income and wishes to defer larger withdrawals until later years.
If one spouse is younger than the other, it is possible to elect the minimum withdrawal amount based on the younger souse's age leading to a smaller withdrawal amount and less taxable income.
What's the bad news about RRSP/RRIFs?
There are two notable negatives when dealing with RRSP/RRIF accounts
- All withdrawals are taxed as income
- Upon death, if there is no tax-free rollover option (by designating a spouse or financially dependant or disabled child/grandchild as beneficiary), then the entire amount of the account is included as income (and taxed as such) in the year of death.
Because there is a risk that an early death could deplete the account significantly through taxes (preventing beneficiaries such as children from receiving their intended inheritance) many people will elect to withdraw more from their RRIF in earlier years and to invest these funds or to gift them to their beneficiaries. In many cases, it is worthwhile to explore and declare all remaining value as income in the year of death.
Drawing down the RRSP/RRIF account faster than mandated is especially popular with individuals or couples who have significantly large RRSP/RRIFs as a percentage of their net worth. The biggest risk to this scenario is spending the extra funds earlier in life and then running out of money too soon. Working with a financial planner to put together a financial plan is an excellent way to avoid a less than optimal experience.