What is a RRIF? How Does a RRIF Work?

Synopsis:  In this article, we’ll dig deep into RRIFs answering questions like: what is a RRIF? How does a RRIF work?  Then we’ll dig into the details like the pros/cons, and the important withdrawal rules. Thanks to all subscribers for sending us their questions on RRIFs!

If you’re not comfortable with relying on just government benefits like Canada Pension Plan (CPP) or Old Age Security (OAS) for your retirement, then join the club. Neither are we!

At Cashflows & Portfolios, we’ve been contributing to Registered Retirement Savings Plans (RRSPs) to supplement any future Canada Pension Plan and Old Age Security government benefits for years now. This way, we have an opportunity to convert our RRSP assets into a very powerful, almost equally important tax-deferred account that is the Registered Retirement Income Fund (RRIF).

What is a RRIF?

How does a RRIF work?

How might you go about transferring your RRSP assets to your RRIF? Are there tax implications with that?

We’ve got you covered today with this updated post – everything you need to know about the RRIF and how it works.

What is a RRIF? How Does a RRIF Work?

Before we get to the RRIF, we need to have an RRSP.

Prior to establishing your RRIF, you might know that the Registered Retirement Savings Plan (RRSP) remains one of the wealth-building wonders of our Canadian world.

RRSPs have been around for decades in Canada – as a means to help (and encourage) Canadians to save for their retirement. The main benefit of this account is a tax-deferral benefit but there are far more benefits to contributing to your RRSP if you use the account wisely.

Make sure you check out our very comprehensive everything you need to know about RRSPs post here.

That post will help you understand the detailed ins and outs of the RRSP, when it makes sense to contribute to that account and why the RRSP is really not tax-free money.

If you want tax free retirement money, you’ll need to check out this monster post:

Everything you need to know about the Tax-Free Savings Account (TFSA).

What is a RRIF – RRIFs 101

As a popular choice for many Canadians (more on that in a bit in our pros and cons section), a RRIF is a federally registered account designed to provide you with a steady income at retirement by drawing down your hard-earned savings and investments.

The best way to think of a RRIF is the opposite of an RRSP:

• An RRSP is for asset accumulation.
• A RRIF is for asset decumulation.

Like an RRSP, a RRIF offers you multiple investment options. You can own a number of different types of investments inside the RRIF, as you draw down assets inside that account:

• Cash
• Guaranteed Investment Certificates (GICs)
• Bond funds or bond ETFs
• Individual stocks
• Equity funds or equity ETFs

At Cashflows & Portfolios, to date, we own a mix of individual, Canadian stocks and low-cost, diversified ETFs in our RRSPs. We figure that’s a great game plan to maximize growth and income so that we have ample assets to draw down from our RRIF in the coming decades.

You can read about some of the assets we own, and why these low-cost ETF solutions might be a consideration for your investing journey here.

A brief history of the RRIF 

Interestingly, RRIFs actually haven’t been around as long as the RRSP – at least they didn’t come into effect in the late-1950s like the RRSP did.

The creation of the RRIF was announced in 1978 as part of the Canadian federal budget and came into effect later that year.

Although you have other options with your RRSP assets, such as withdrawing monies from the RRSP outright or using RRSP money to purchase an annuity, we believe the most flexible option with your RRSP is to convert it to a RRIF.

In fact, it is mandatory to either withdraw all the money for your RRSP, purchase that annuity, or convert your RRSP to a RRIF by the end of the year you turn age 71.

This is because the government wants to get some of its money back!

Kidding, although only a bit. Remember above the RRIF was established to help ensure RRSP account holders can have another alternative to earning an income stream with a great deal of control over their investments, but it is a tax-deferred account. RRSP withdrawals nor RRIF income is certainly not tax-free.

Let’s cover a few pros and cons of each option (RRSP cash withdrawals, annuity, and why the RRIF makes the most sense to us) in the sections below.

Pros and cons of using a RRIF

While most Canadians are fairly knowledgeable about the benefits of contributing to their RRSP, we believe even fewer Canadians understand the benefits of transferring their RRSP to a RRIF.

Here is a list of those benefits and why we will likely convert our RRSP to a RRIF at an appropriate time.

1. You can continue to grow your assets tax-deferred: All of your RRSP assets can be transferred in-kind, tax-free to your RRIF. Once in the RRIF, assets continue to grow on a tax-deferred basis. But keep in mind, any money withdrawn from your RRIF account is taxable in the year received.

2. You get an income stream without any withholding taxes on the minimum payment: While there is an annual minimum payment amount that must be withdrawn from your RRIF account (we’ll put a table for you below), there is no maximum payout amount. Withdrawals can include some scheduled payments and/or lump-sum payments – whatever you prefer. Unlike withdrawals from an RRSP, there are no withholding taxes deducted on your minimum RRIF payments.

To help you see the merits of RRIF vs. RRSP withholding taxes that may apply if you use the latter account, we’ve included this information below.

If you’re taking money out of your RRSP before you retire before a RRIF is established, you’re immediately going to pay a *withholding tax (with some exceptions):

1. If you take up to $5,000, you’re going to pay 10%.
2. If withdrawals are between $5,000 and $15,000, the financial institution will hold back 20%.
3. If you withdraw more than $15,000, 30% is held back.

*Quebec has different withholding tax rates.

3. You can base your RRIF payments on your spouse’s age: While minimum payments are required when setting up RRIF accounts, you can elect that the minimum payment be based on your spouse’s age, providing additional flexibility if your spouse is younger than you!

4. You can split your pension income up to 50%: Retirees can split up to 50% of eligible pension income (with a spouse or common-law partner) for individuals 65 years old or older. Since RRIF income qualifies as eligible pension income, you might save more tax.

Beyond that, consider that starting age 65 – income from your RRIF qualifies for up to $2,000 towards the Pension Income Credit each year (if it’s not already being used with a private pension plan), which could mean substantial tax savings over time.

5. You can leave your RRIF to your spouse tax-free: If your spouse is named as the beneficiary of your RRIF, it can be transferred tax-free to their RRSP or their own RRIF. If you name your spouse a “successor annuitant”, they can take over your RRIF tax-free and start receiving RRIF payments. In both cases, your RRIF will not make up part of your estate and will avoid probate fees.

Check out this comprehensive post on My Own Advisor that walks you through, in detail, some considerations for TFSA, RRSP, RRIF and other account beneficiaries.

Are there different types of RRIFs?

Yes. There are two key ones in particular we want to highlight.

There are self-directed RRIFs, just like there are self-directed and personal RRSPs.

In your self-directed RRIF, you can hold many different kinds of investments: GICs, mutual funds, ETFs, stocks and bonds. We believe this is the best choice to deliver:

• a wide range of investment choices, and
• to change such choices as your needs or tolerance for risk changes as you age.

There are also spousal RRIFs. When a spousal RRSP plan is converted to a RRIF, it becomes a spousal RRIF where withdrawals are made by the annuitant (i.e., not the spouse who contributed the money).

If you’ve contributed to a spousal RRSP in the year or in either of the two preceding taxation years of the RRIF withdrawal, be aware that there may be income attribution back to the contributing spouse. Again, there are tax considerations with any spousal RRIF you may want to discuss with your accountant or a fee-only financial professional if unsure.

Are there other benefits that come with RRIFs?

You bet!

While your decisions may vary, we believe a RRIF can make the most sense to wind down your assets during retirement for these key reasons:

1. RRSP assets can be moved “in-kind” to the RRIF (i.e., “as-is”) and remain tax-deferred. So, you don’t need to sell any RRSP assets if you don’t want to when you create a RRIF. Just a reminder that once some or all RRSP assets are moved over to the RRIF, any money withdrawn from your RRIF is taxable in the year it is received.
2. You don’t need to move all RRSP assets to the RRIF. In fact, you only need to move all RRSPs “out” by the end of the year you turn age 71. By creating a RRIF at any age before age 71, provides major income flexibility in retirement.
3. RRIF assets grow tax-deferred. That’s right! As you read above, the magic of compounding can continue well into your senior years since assets that remain within the account can continue to grow for more income, inflation-fighting power, and more!

Let’s look at more Q&As to see how you can best manage the assets you may hold inside a RRIF.

RRIF minimum withdrawals

Another nice perk of establishing a RRIF is there is no withdrawal necessary in the year a RRIF was set up.

That said, there are minimum amounts that must be withdrawn annually starting in the year after the RRIF was established.

Unless certain types of annuities are held in the RRIF, the minimum withdrawal amount is calculated by multiplying the market value of the RRIF holdings at the beginning of the year (January 1) by prescribed withdrawal factors.

Like everything it seems with the government, they make this overly complex.

Prescribed Withdrawal Factors for RRIFs

The 2015 Federal Budget reduced the RRIF withdrawal factors for both pre-1993 and post-1992 RRIFs, so to our knowledge all RRIFs now use the same prescribed factors.

Essentially, these changes allow seniors to keep more of their hard-earned savings to grow inside their RRIF accounts tax-deferred, and the new minimums also reflect Canadians’ increasing life spans.

Note that any RRIF annuitant can elect, prior to receiving any payments, use the age of their spouse or common-law partner for calculating the prescribed factor, for both qualifying and non-qualifying RRIFs.

So, what that means in plain language: if the spouse is younger, a lower minimum withdrawal can occur.

Background – Prescribed Withdrawal Factors – Post-1992 RRIFs – Factors Before 2015

For a RRIF that started after 1992, the prescribed factor was 1/(90-age*), but only if the RRIF annuitant (owner) was under 71 years old.

*Age of the RRIF annuitant at the beginning of the year. For example: if the annuitant was 68 years old at the beginning of the year, the factor would be 1/(90-68) = 1/22 = 0.0454.

Background – Prescribed Withdrawal Factors Pre-1993 RRIFs – Factors Before 2015

For a RRIF started prior to 1993, this is “qualifying RRIF”.

The prescribed factor for a qualifying RRIF was 1/(90-age), but only if the RRIF annuitant was under 79 years old. For example: if the annuitant was 75 years old at the beginning of the year, the factor is 1/(90-75) = 1/15 = 0.0667.

Is this is making your head spin a bit, don’t worry, we’ll simplify the current RRIF withdrawal schedule in the table below. If you are however looking for more RRIF details related to withdrawal factors, please check out Canada Revenue Agency here.

Thanks to the folks at Taxtips.ca for these references.

RRIF minimum withdrawal factor table:

The following table are the factors post age-71 for RRIFs:

Tables and references from the stellar Taxtips.ca site.

Some notes on withdrawals and reminders about the table above:

• Once a RRIF has been established, no further contributions to the RRIF can be made. Withdrawals must happen!
• A minimum RRIF withdrawal is an annual obligatory amount that is cashed out of a RRIF and sent to the owner.
• The RRIF withdrawal occurs without withholding tax – something you may recall that happens with the RRSP cash withdrawals.
• All withdrawals are fully taxable. Remember, the government wants their tax-deferred loan to you back!
• Required annual minimum payments generally increase as you get older.
• In addition to cash, withdrawals can also be made in “in-kind” – meaning securities can be withdrawn at their fair market value. You’ll have to include the value of the withdrawal as income at tax time – but if you don’t need the money, you have the option to contribute the securities in-kind from a non-registered account to your TFSA without selling them (if you have the contribution room to the TFSA to do so). This way, your former RRIF assets can now grow tax-free (thanks TFSA!)
• There are no direct transfers (cash or securities) from a RRIF into a TFSA.
• To reduce your household’s overall tax bill, again, consider splitting RRIF income. The transferor is required to be 65 or over and can allocate up to 50% of their RRIF income to their spouse (both have to be Canadian residents). Sources of pension income other than RRIFs are also eligible.
• If you have more than one RRIF account, you must withdraw at least the minimum annual amount from each of your accounts.
• You’ll have to pay withholding tax only if you take out more money from your RRIF than the government-prescribed annual minimum amount. Withholding tax rates differ depending on your province of residence (e.g., Quebec).

Let’s tackle some specific Q&As!

Can I transfer money from a regular savings account or my taxable account into my RRIF?

Nope. Recall the RRIF is locked-in account per se, you must take money out as per the withdrawal schedule. Minimum withdrawals will apply.

Can I convert my RRSP to a RRIF before I turn 71?

Absolutely. See some of the benefits above! A reminder if you withdraw funds from your RRIF that exceed the minimum annual payment there will be withholding tax on the excess amount.

Is there a minimum amount needed to set up a RRIF?

There is usually no minimum amount to establish your RRIF but it would make sense you are opening this account to withdraw some meaningful income.

Can I have a RRIF and an RRSP?

Why not? The answer is you can have both accounts at the same time.

You must however, collapse the RRSP by the end of the year you turn age 71.

If I can have an RRSP and a RRIF, can I have more than one RRIF?

You bet.

Just like you have have more than one RRSP (e.g., a personal RRSP, a Group RRSP at work), you can also have more than one RRIF. Be careful though, have more than 1 or 2 RRSPs or RRIFs can be complex to manage. You must keep track of your minimum annual withdrawals from each account.

I have a Locked-In Retirement Account (LIRA). Can I convert this to a RRIF?

There are special options available for converting pension funds from a LIRA or locked-in RRSP, they call it “unlocking”, which is dictated by provincial and federal rules. We’ll cover LIRAs, LIFs and other similar accounts on the site in a dedicated post.

Does anything happen to my investments in my RRSP when I convert to a RRIF?

That’s your decision. You can however simply transfer your RRSP assets “as is” / in-kind to your RRIF. There are no tax implications to do so.

Can I still own foreign stocks, ETFs, or other international assets in my RRIF, like I did with my RRSP?

You bet.

Do I have to withdraw money from my RRIF right away? Can you give me an example?

No – you do not have to withdraw any money right away.

In the first year that your RRIF is opened, you are not required to make a withdrawal. However, you must make your minimum withdrawal in the following year, based on your age and the dollar value of your RRIF at the start of that year.

Yes, let’s look at an example with thanks to Get Smarter About Money:

“On January 1, 2015 you were 82.

The value of your RRIF on December 31, 2014 was $200,000.

Based on the previous 9.27% minimum withdrawal amount, you would have had to withdraw at least $18,540.

Based on the new minimum withdrawal amount of 7.38%, you must withdraw at least $14,760 in 2015.

This means you can leave an additional $3,780 in your RRIF to continue to grow tax-deferred.”

Can I choose the frequency of my RRIF withdrawals?

Yes! Important stuff.

RRIF withdrawals may be made monthly, quarterly, semi-annually or annually. You get to choose your withdrawal schedule that meets your needs. You might find however that an annual RRIF withdrawal, near the end of the year or near the very start of the year could be strategic to let your RRIF grow throughout the following 11+ months. We say that because you can consider moving tax-deferred (RRIF money) into tax-free (TFSA money). Read on!

Why am I forced to make a RRIF withdrawal when I don’t need the money?

Good question – because the government wants their tax-deferred loan back!

Like it or not, you are are required to withdraw a minimum annual amount from your RRIF, whether or not you need that income, and that money withdrawn is fully taxable.

We believe since the birth of the TFSA however, if you don’t need the money, put your RRIF income there inside that account to grow your money tax-free. Unfortunately, you cannot move your RRIF payments directly into a TFSA. Withdrawals can be made “in kind” though (i.e., “as is”) and given a fair market value as a non-registered asset. Then those assets can be moved inside your TFSA as part of this two-step process.

When to withholding taxes apply to my RRIF?

Only when you take out more money from your RRIF than the government-prescribed annual minimum amount – see those tables and our example above.

Can I do an in-kind transfer from my RRIF to my TFSA?

Well, you are required to withdraw the minimum annual amount from your RRIF, whether or not you need that income, and it is fully taxable.

When money is withdrawn from the RRIF, you may choose to contribute the money to a Tax-Free Savings Account (TFSA), if you have the contribution room but as far as we know – you cannot move your RRIF payments directly into a TFSA.

In addition to cash contributions from your RRIF withdrawals to your TFSA,RRIF  withdrawals can also be made in “in kind” – meaning securities can be withdrawn at their fair market value from a RRIF and transferred to a non-registered account without selling them. You’ll have to include the value of the withdrawal as income at tax time (and if the value of the securities exceeds the minimum annual amount, withholding taxes will apply).

Again, you can’t transfer funds tax-free from a RRIF to a TFSA. You can, however, use funds from a RRIF to add to a TFSA as long as you have available TFSA contribution room. One such type of transfer is an “in-kind transfer”. Like any RRIF withdrawal, you’ll have to include the withdrawal amount as income during tax time.

We’ve included a good resource to this information above.

RRIF Summary

As long as the government doesn’t change the rules (they can always change the rules!), RRIFs will likely remain a popular choice for many Canadians for their asset decumulation years.

When used wisely and effectively, these accounts can be excellent sources of retirement income and serve many Canadians well for any estate planning needs.

Our key reminders:

• There is no maximum withdrawal limit for RRIFs.
• All withdrawals are fully taxable.
• If you take out more than the minimum amount, you’ll also pay withholding tax on the excess amount. Your financial institution will hold back an amount, based on the withholding tax rates, and pay it directly to the government on your behalf.
• If you withdraw as little as possible in the early years of your RRIF, your savings will last longer. That’s because RRIF assets will continue to grow tax-deferred until you make the mandatory withdrawals.

We hope you enjoyed this comprehensive post and everything it entails. We’ll continue to amend and add to the article over time so you have one-stop shopping for your RRIF needs.

Thanks for your readership!

Further Reading – how did we get to the RRIF?

Check out our stellar Everything You Need to Know about RRSPs here.

Need any support with your retirement income projections?

Knowing how to save and invest wisely, whether that is via your RRSP, TFSA, or any other account, to help you get the most out of your portfolio is information we are happy to write about but we believe the bigger challenge is retirement income planning when it comes to RRIFs and asset decumulation in general. It can be a complex puzzle for most! On that note…

If you are interested in obtaining private projections for your personal financial scenario, read more about our retirement projections service.

Simply contact us via that link above to get started!

Related Reading:

• Use this BTSX strategy to juice your retirement income.
• Can you retire with just $500,000 invested inside an RRSP?
• This investor wants to retire early: how much do they need to save by age 50?
• This is how a side-hustle can help you retire earlier!

Mark and Joe.

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