Eight things to know about RRIFs

 Registered Retirement Savings Plans (RRSPs) are Canada’s most popular retirement savings vehicle for good reason. You get a tax deduction for the contributions you make, plus the amount saved, which grows in a tax-sheltered account.

But in the end the government wants its taxes. So in the year you turn 71 an RRSP must be converted into a Registered Retirement Income Fund. (RRIF).  Thereafter you must draw down the fund each year by amounts according to tables set out by Ottawa. 

Any changes to withdrawal rates are usually included in federal budgets and later passed into law by Parliament. No changes have been legislated for 2022.

1. What is a RRIF?

A RRIF is a vehicle that allows Ottawa to get the tax refunds back. Unlike an RRSP which was designed as a way to encourage Canadians to save for retirement, a RRIF is an income plan. It is a structured way to cash out your RRSP.

2. How does a RRIF work?

The amount you withdraw changes each year after age 71 and is set out in tables by the Department of Finance. Your bank or investment advisor will have them.

You can start earlier than 71, but not later.

The minimum withdrawals were relaxed in the 2015 federal budget to recognize that we’re living longer and rates of return on investments are much lower than they were.  In March, 2020 then Finance Minister Bill Morneau reduced the minimum withdrawal rate for by 25% for the year as a one-time response to COVID-19.  In 2021 they returned to normal.

3. A sample calculation

If you were 71 on Jan. 1, 2023, you must withdraw 5.28 per cent of the opening balance in your RRIF for the year as per the tables. If you were 72, the amount is 5.4%. The withdrawal rate rises each year until age 95 when it peaks at 20%.

Depending on your cash flow needs you can take out all the money on Jan. 1 or all on Dec. 31, or at any combination in between.

You can also withdraw more than the minimum, but never less.

4. How do I set up a RRIF?

You set up a RRIF through a bank, credit union, trust or insurance company. They will advise you on the types of RRIFs and the investments they can hold.  Your advisor can also help .

You can transfer out of your RRSP as a lump sum, you can keep the same investments and sell them bit by bit, or you can convert your RRSP into an annuity that pays a monthly amount for life.

 Each has a tax liability.

5. Can I have more than one RRIF?

Yes. You can have more than one RRIF and you can have self-directed RRIFs. You may want to set up a self-directed RRIF if you prefer to manage your investments yourself.

 Once the RRIF is established, you cannot contribute any more to it. And the plan cannot be  terminated except by death.

6. Is it only RRSPs that must be converted?  

No. A Pooled Registered Pension Plan (PRPP) RPP or unmatured RRSP, including a direct transfer of a commutation payment from your RRSP annuity must be converted. So must an unmatured RRSP under which your current or former spouse, or common-law partner is the annuitant.

7. What can I hold in a RRIF?

There are no restrictions on the type of investment. You can keep the RRSP holdings as is and sell the appropriate amounts. You can hold any combination of stocks, bonds, GICs, mutual funds or Exchange Traded Funds (ETFs).  

Each retiree must decide the right mix for their circumstances.

8. What happens to a RRIF when I die?

If you are the beneficiary of the deceased – often a spouse – the amounts received from a RRIF can be transferred to your RRSP,  RRIF or PRPP.