The Registered Retirement Income Fund, commonly called the RRIF, is a special account funded by your RRSP account where you can efficiently withdraw money to fund your retirement.
A RRIF account is a great way to set up regular withdrawals that are tax efficient and specifically designed for older Canadians to take income in retirement.
The RRIF complements and ultimately takes over from your RRSP account.
What is a RRIF Exactly?
A RRIF is an investment and withdrawal-only retirement fund. A RRIF is an account that can hold a wide range of qualified investments including publicly traded stocks, bonds, listed options, GICs, ETFs, REITs, mutual funds, mortgages packaged within a mortgage investment corporation, a non-arms length mortgage on your own house using a mortgage trustee, precious metals, certain foreign currency exchange investments, and small business shares in limited cases.
A RRIF is not something you can buy from a bank. It is not an investment itself. Rather it is a restricted investment account with certain tax privileges. You can manage your own RRIF with a self-directed brokerage account like Questrade, you can hire an advisor to manage your RRIF investments on your behalf, or you can engage a trustee to secure certain RRIF investments.
You cannot contribute directly to a RRIF account. Instead, RRIFs are only funded through direct transfers from your RRSP account. All RRSP accounts must be transferred to RRIF accounts in the year the account holder turns 71 years old.
Once you have money in a RRIF, you must make regular annual withdrawals from your account in accordance with a preset schedule.
Withdrawing from a RRIF
A RRIF account is specifically designed for withdrawing money that was formerly invested in a RRSP account.
As with the RRSP, withdrawals from a RRIF are taxed as regular income. However, when making withdrawals from a RRIF after the age of 65, you will qualify for the pension tax credit and for pension income splitting.
In addition, RRIF withdrawals are not subjected to withholding taxes from your brokerage on the minimum required withdrawal amount. You only pay taxes on these withdrawals when you file your tax return. If you withdraw more than the required amount, taxes will be withheld by your brokerage.
Compared with making withdrawals from a RRSP, you can withdraw an extra $2,000 per year per account holder completely tax free. You can also defer your taxes owed for sometime because you will file your taxes in the spring of the following year. You may also split up to 50% of your RRIF withdrawal with your spouse, further reducing your income taxes.
Minimum RRIF Withdrawals
The year after you established and transferred money to your RRIF, you must begin making withdrawals from your RRIF account every year. The required minimum withdrawal amounts are based on your account value and your age.
For the withdrawal calculation, your account value is established as the total market value of the RRIF account on the first day in January of the current year. Your age is normally the age of the account holder; however, if you have not yet received any payments from your RRIF account, you may select the age of your spouse instead. It is generally advantageous to select the age of the younger partner because your minimum required withdrawals will be lower.
Before the age of 70, the calculation is as follows:
Account Value x (1/90-[your/spouse age])
Starting at age 71, the calculation changes. Withdrawals start at 5.28% of the account value and climb each year to a maximum of 20% of the account value when the RRIF holder is 95 and older. (The exact minimum withdrawal percentage for RRIF holders above age 71 can be found on the Canada Revenue Agency website and many brokerage websites.)
The required withdrawal based on the calculations is only the minimum. Any account holder may withdraw more than the minimum without any limit. Just remember that all withdrawals from a RRIF are taxed as regular income—with some tax perks as mentioned above.
Since the RRIF required minimum withdrawals are based on your account size, it could be advantageous to open a RRIF before the age of 71 and move just a part of your RRSP to your RRIF account. This can help you have greater control over your income and taxes.
Withdrawals from your RRIF are taxed as regular income. In this way they are no different from your RRSP account. However, RRIF withdrawals do qualify for pension tax credits making them more tax efficient for account holders over the age of 65.
You can take several steps to further reduce taxes on withdrawals from your RRIF account. Your RRIF account can hold the exact same kind of investments that your RRSP and TFSA accounts can hold. This means you can design certain structures to reduce taxes on RRIF withdrawals.
Non-residents and RRIFs
Just as with a RRSP account, if you have a RRIF account and you become a non-resident of Canada for tax purposes, you can legally retain your RRIF account and continue investing within that account. The RRIF is generally recognized as a pension account in Canada's tax treaties with other countries, so any gains within the account would not be subject to taxation. However, it is important to always check the tax treaty that applies to your new country of residence and ensure this is the case.
Keeping your RRIF and maintaining your investing within the account is a great option for non-residents. You will be required to make minimum withdrawals based on Canada Revenue Agency's schedule even if you are a non-resident. However, in most countries where Canada has a tax treaty in place, the required withdrawals are only subject to a flat rate 15% withholding tax in Canada. Further, the withdrawals are not taxed in your new country of residence.
Becoming a non-resident is a great way to reduce your taxes on your RRIF account withdrawals. If you have a large RRIF and would like to withdraw the entire amount in a lump-sum, you will typically be able to do that at a withholding tax rate of just 25%. Although the regular periodic withdrawals are taxed at a much lower rate, this may still be a good option for some people.
Not all brokerages will allow customers to maintain their RRIF accounts after they become non-residents. If this is the case for you, find a brokerage that accepts non-resident accounts. As of 2019, Questrade is one of the brokerages that does.
Dying with a RRIF
When an individual with RRIF dies, the value of their RRIF is considered to be withdrawn and the entire value is taxed as regular income on the deceased person's final tax return. If the RRIF account value was substantial, the taxes owing on the estate be very substantial as well. Tax rates on RRIF income can go up to 54% in some provinces.
Make sure the estate has enough funds set aside to pay for the taxes owing when the final tax return is done. Generally brokerages will not withhold a sufficient amount to cover these taxes.
The RRIF can be transferred tax free to the beneficiary in certain cases:
- If the beneficiary is the deceased person's spouse or common-law partner;
- If the beneficiary is a dependent child or grandchild under the age of 18; or
- If the beneficiary is a dependent disabled child or grandchild of any age.
The RRIF value must be transferred to the beneficiary's RRIF or RRSP. The beneficiary will then pay taxes on withdrawals they make from their registered account.
There are some other requirements to be eligible for this type of transfer, so be sure to speak with an accountant or estate lawyer to ensure a smooth tax-efficient transfer.