What Is a RRIF Account and How Does It Work?

A Registered Retirement Income Fund (RRIF) is a financial tool within the Canadian retirement savings system, designed to provide income during retirement. Individuals typically establish a RRIF by transferring accumulated savings from a Registered Retirement Savings Plan (RRSP). The purpose of a RRIF is to convert retirement savings into regular payments. This ensures funds saved can be accessed systematically to support living expenses. As a registered account, a RRIF operates under specific rules set forth by Canadian tax authorities.

Core Features of a RRIF

A Registered Retirement Income Fund functions as a continuation of the tax-deferred growth of savings accumulated in an RRSP. While its primary role shifts to providing income, investments within the RRIF can continue to grow without immediate taxation on earnings, allowing the fund to potentially increase in value even as income is drawn.

RRIFs offer flexibility regarding the types of investments they can hold, mirroring options available within an RRSP. Account holders can invest in a diverse range of assets, including mutual funds, Guaranteed Investment Certificates (GICs), stocks, bonds, and Exchange-Traded Funds (ETFs). This broad selection allows individuals to align their RRIF investments with their personal risk tolerance and financial objectives during retirement.

The distinction between an RRSP and a RRIF lies in their function. An RRSP is primarily a savings vehicle for accumulating funds with tax-deductible contributions. In contrast, a RRIF is an income-generating vehicle from which withdrawals are made.

No new contributions can be made to a RRIF. While an RRSP focuses on growth through contributions and investment returns, a RRIF is structured around providing regular income payments. A characteristic of a RRIF is the requirement for mandatory minimum withdrawals each year.

The RRIF is held by the original annuitant. This ensures the income stream is directed to the person for whom the retirement savings were accumulated. The annuitant maintains control over the investment decisions within the RRIF.

Transitioning to a RRIF

The conversion of an RRSP into a RRIF marks a transition in an individual’s retirement planning. While an RRSP can be converted into a RRIF at any age, it becomes mandatory to do so by December 31 of the year in which the RRSP holder turns 71. This deadline ensures that accumulated tax-deferred savings begin to be drawn down in retirement.

The process of converting an RRSP to a RRIF is handled through a financial institution. This involves completing paperwork to transfer the investments from the RRSP into a RRIF account. The transfer is a non-taxable event, meaning no immediate tax is incurred on the amount converted.

Beyond converting to a RRIF, individuals also have other options for their RRSP funds by the age 71 deadline. These alternatives include purchasing a life annuity, which provides guaranteed income payments for a set period or for life. Cashing out the entire RRSP is another option, though this results in the full amount being immediately taxable as income.

For married or common-law partners, a spousal RRIF can be established. This arrangement allows for the transfer of funds from a spousal RRSP into a RRIF in the name of the annuitant or their younger spouse. This strategy can be useful for income splitting in retirement, potentially reducing the overall tax burden for the couple.

Managing RRIF Withdrawals

Once a RRIF is established, the annuitant is required to begin making withdrawals from the account. The first mandatory minimum withdrawal must occur in the calendar year following the year the RRIF was opened. This ensures that the tax-deferred funds are gradually disbursed during retirement.

The minimum withdrawal amount each year is calculated as a percentage of the RRIF’s value at the beginning of the year. This percentage is determined by the annuitant’s age, or the age of their younger spouse or common-law partner if designated. The percentage increases as the annuitant ages, leading to larger required withdrawals over time.

For instance, at age 72, the minimum withdrawal percentage is 5.40% of the RRIF’s value. This percentage continues to rise, reaching 20% by age 95 and beyond. The calculation ensures a progressively larger portion of the RRIF is withdrawn as the individual ages, reflecting the intent for these funds to provide retirement income.

Annuitants have flexibility regarding the frequency of their RRIF withdrawals, choosing to receive payments monthly, quarterly, or annually. While there is a mandatory minimum withdrawal, individuals are permitted to withdraw more than this amount if their income needs require it. However, taking out more than the minimum can have tax implications.

Each withdrawal reduces the capital held within the RRIF. Therefore, ongoing withdrawals, especially those exceeding the minimum, will decrease the overall value of the fund over time. This highlights the importance of managing withdrawals carefully to ensure the RRIF provides income for the desired duration.

Tax Considerations and Beneficiaries

All amounts withdrawn from a Registered Retirement Income Fund, including the mandatory minimum, are considered taxable income in the year they are received. This means that RRIF payments are added to other sources of income and taxed at the individual’s marginal tax rate. Financial institutions will issue a tax slip detailing the total withdrawals for the year.

Financial institutions are required to withhold tax on RRIF withdrawals that exceed the mandatory minimum amount. This withholding tax acts as an advance payment towards the annuitant’s overall tax liability for the year. The amount withheld depends on the size of the withdrawal and is designed to approximate the eventual tax owing.

Designating a beneficiary or successor annuitant is an aspect of RRIF planning. A successor annuitant is a spouse or common-law partner who can take over the RRIF upon the original annuitant’s death, allowing the funds to continue growing on a tax-deferred basis. This provides a seamless transfer of the income stream.

Upon the death of the annuitant, the tax implications of the RRIF depend on the designated recipient. If a spouse or common-law partner is named as a successor annuitant, the RRIF can be rolled over to them on a tax-deferred basis. This allows the survivor to continue receiving income without immediate tax consequences on the full RRIF value.

If beneficiaries other than a spouse or common-law partner are designated, the fair market value of the RRIF at the time of death is considered fully taxable income in the deceased’s final tax return. There are exceptions, such as for financially dependent children or grandchildren. Proper beneficiary designation is a component of estate planning, as it can impact the tax burden on the estate and beneficiaries.