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Retirement savings

August 02, 2017

How RRIFs work

A registered retirement income fund (RRIF) is a common way to turn retirement savings into income. Here are some important facts you need to know.

While most Canadians understand the importance of putting money into their RRSPs, there is less chatter about what to do with your retirement nest egg once you’re forced to withdraw those funds.

RRSPs are great vehicles for driving your retirement savings, but ultimately these accounts have an expiry date. By law, you must convert your RRSP into some form of income by December 31 of the year you turn 71. But if you simply convert your RRSP to cash, this additional income can leave you with a massive tax bill. So what's the best way to deal with your retirement savings when you turn 71?

As an alternative to withdrawing your savings as cash (or purchasing an annuity, another option), an excellent way to maximize your hard-earned savings is to transfer your RRSP funds into a registered retirement income fund, commonly known as a RRIF. 

What is a RRIF?

Think of a RRIF as the older sister of your RRSP – there are several similarities between the 2 plans. Just like with an RRSP, you can defer paying tax on your investments in a RRIF while they grow. Also just like an RRSP, a RRIF can hold a variety of investments, such as mutual funds, guaranteed investment certificates (GICs), stocks and bonds, or actually be investments such as insurance GICs and segregated funds.

Kevin Potvin is the owner and principal financial advisor at Ottawa-based Potvin Financial Services. He says RRIFs give you the flexibility to liquidate some of your funds if you need extra cash, while still letting you grow your investments and postpone your tax bill. You can own more than one RRIF, and you can withdraw more than the minimum if you need it (keeping in mind that doing this will deplete your RRIF faster).

How do RRIF withdrawals work?

RRIFs differ from RRSPs significantly when it comes to withdrawals. Because the tax bill on your retirement savings has been deferred – not eliminated – first through your RRSP and then your RRIF, the government will eventually get its due. RRIFs require minimum annual withdrawals based on your age (starting the year after you open your account), and you must continue to make these minimum withdrawals until no funds remain. The Canada Revenue Agency (CRA) has a table showing the minimum withdrawal factors for RRIFs. The financial institution from which you bought your RRIF will calculate your minimum withdrawal dollar amount every year. As you gradually draw down your savings, the balance can remain and grow in your RRIF tax-free.

Note: If your spouse or common-law partner is younger than you are, you can make your RRIF last longer by basing your withdrawals on your spouse’s age rather than yours. If you choose this option, you’ll need to register this information when you first open your RRIF account.

What if you don’t need the money right away?

You will be taxed whenever you take money out of your RRIF, but if you don’t need the cash immediately, there are ways to make the most of your required withdrawals. For example, if you have the contribution room, you can put the money in a tax-free savings account (TFSA) so that it can continue to grow tax-free. You could also put it in non-registered investments, but be prepared to pay tax on the investment growth.

How do you transfer funds into a RRIF?

RRIFs are funded by transferring money from your or your spouse’s or common-law partner’s RRSP (if you are living apart at the time of the transfer and the transfer is made as a result of the breakdown of your relationship), or from your employer’s deferred profit-sharing plan. Your financial institution or advisor should notify you when your RRSP is nearing the conversion deadline, and offer you various retirement income options.

When should you open a RRIF?

The CRA requires Canadians to convert their RRSPs into income by December 31 of the year they turn 71; however, you may want to do it sooner, “A lot of people think they can’t open a RRIF until they’re 71, but you could do it at 30 if it makes sense with your situation,” says Potvin.

If you retire early, or take a sabbatical or a break from work due to a family emergency, then it may be beneficial to convert your RRSP into a RRIF, especially since your loss of income likely means you’ll be in a lower tax bracket, says Potvin.

For example, when the wife of one of Potvin’s clients was ill, his client took time off work to care for her. During this time he converted his RRSP into a RRIF and withdrew income from his RRIF to pay the bills while he wasn’t working. When he returned to work he converted the RRIF back into an RRSP.

You can convert your retirement savings back and forth between a RRSP and RRIF if you are under 71. Keep in mind, though, that you will still have to take the minimum withdrawal in the tax year you convert it back to a RRIF. Also note that once you withdraw cash from any tax-deferred account – an RRSP or a RRIF – you’ll have to pay tax on it. So consult your financial advisor to find the most tax-efficient option for you.

A common misconception about RRIFs

Here’s another reason to talk to a financial advisor: Keeping up with all the tax laws can be a challenge, and people may not always understand them. “The number-1 misconception I find with RRIFs is how surprised clients are to be told that in the absence of a rollover to a spouse on death, the remaining market value of your RRIF is taxable to your estate,” says Potvin. 

This means your estate will be on the hook for a tax bill if you die while the account still has funds – unless your beneficiary meets certain criteria. For example, if you have financially dependent disabled children or grandchildren who receive a disability tax credit, they can move the funds from your RRIF into a registered disability savings plan (RDSP) tax-free (up to certain limits), lowering the estate’s tax bill. There are a few other ways you can transfer funds from your RRIF to your loved ones tax-free. For example,  a financially dependent child or grandchild under 18 named as the beneficiary could use the funds to purchase an eligible annuity. For more information on transferring funds to your family, speak to an advisor.

Top benefits of RRIFs

  • RRIFs let your spouse inherit your retirement savings tax-free, easing some of the financial pressure your absence may cause.
  • RRIFS can hold a variety of assets, so you can keep your investments diversified.
  • While invested in your RRIF, your money can continue to grow tax-free, letting you keep your savings working for you throughout your retirement.

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