Education - Registered Retirement Income Funds

What is a RRIF?

In order to comply with the Government of Canada Requirements, a RRIF is an investment plan into which you can transfer registered funds (like RRSPs) without tax liability. This RRIF then becomes an established income stream.

With a RRIF, starting the year after the plan is opened; an annual minimum payment must be taken each year and is considered taxable income.  The year the plan is opened a payment does not have to be made, but you are free to withdraw any amount (however, in this case, withholding tax will apply to the full withdrawal amount).

The annual minimum payment that must be taken from a RRIF each year is determined by the Income Tax Act and is based on age.  Your own age or your spouse’s can be used to calculate the annual minimum payment.  Using the younger of the ages will result in a lower annual minimum payment.  This means less money will have to be withdrawn and taken into a taxable income for the year and more remains in the RRIF earning tax-sheltered income.

How is the minimum calculated?

Prior to 1993 RRIFs could only last until age 90.  Now that RRIFs can last for a lifetime, there are two methods used for calculating the annual minimum payment.

Method #1: 90 minus age formula

For Qualifying RRIFs (this is a RRIF opened before December 31, 1992), this method is used up to and including age 77. 90 minus age formula.

For RRIFs opened after 1992; this method is used for ages 70 and under:

RRIF value on December 31st, 90 minus age on January 1st. 

Method #2: 90 Percentage schedule

This method is used for ages 71 and older:

RRIF value on December 31st x percentage for age on January 1st.

Age

Percent

69

4.76

70

5.00

71

7.38

72

7.48

73

7.59

74

7.71

75

7.85

76

7.99

77

8.15

78

8.33

79

8.53

80

8.75

81

8.99

82

9.27

83

9.58

84

9.93

85

10.33

86

10.79

87

11.33

88

11.96

89

12.71

90

13.62

91

14.73

92

16.12

93

17.92

94+

20.00

 

How are payments taxed?

Like your RRSPs, RRIFs grow tax-deferred.  The only real difference is that you’ll have to withdraw at least the annual minimum payment required under the Income Tax Act, which is taxable as income. 
All payments from a RRIF must be declared as income for the year they are received.  Tax must be withheld on amounts withdrawn in excess of the annual minimum amount that is required to be paid under the Income Tax Act (Canada).

What investment options are available for my RRIFs?

The government requires that everyone with a Registered Retirement Savings Plan (RRSP), including any locked-in savings plans ( LRSPs/LIRAs), must convert their RSP to one or more retirement income sources by December 31st of the year you turn age 71.  Otherwise, the plan will become “de-registered” and the proceeds will be paid out as cash and fully taxed as income.
However, you may choose to convert your RRSP earlier (subject to the minimum age restriction for locked-in plans).  The decision depends on the income you need from your RRSPs to meet your personal retirement expenses.

When you’re ready to convert your RRSP, you have the following choices:

1.   Convert to a RRIF
A Registered Retirement Income Fund gives you the flexibility to choose different types of investment and payments schedules.  You are required to take a minimum annual payment based on age, starting the year after the plan is opened.  Whatever assets remain in your RRIF after death can be passed on to your spouse or beneficiaries.  Other beneficiaries can receive your RRIF assets once the taxes have been paid.

2.   Purchase an Annuity
In return for a one-time lump sum purchase, you receive regular fixed payments.  You can either purchase a Registered Fixed Term annuity that allows you to pass on any remaining funds to your beneficiaries on death, or a Life annuity that pays you as long as you are alive.  However, in either case, you are locked in to whatever interest rate is available at the time of purchase.

3.   Cash In
You can take your RRSP as cash, but it will be fully taxable in the year of withdrawal and a large percentage will go Canada Customs and Revenue Agency.

4.    A Combination
Some investors choose a combination of a RRIF and annuity.  The RRIF gives you both investment and payment flexibility while an annuity gives a guaranteed income stream.

For Retirement Income Planning Assistance

If you have any questions about RRIFs or RRSPs conversions, annuities, Locked-In Funds and many other issues that can affect your retirement enjoyment please give us a call at 416-238-5606.