In retirement, you’ll need adequate income to cover your expenses. Registered Retirement Income Funds (RRIFs) are a popular vehicle to create regular cash flow. Of course, government and company pensions, as well as any savings and registered/non-registered investment accounts you may have, will represent pieces of your income puzzle, but RRIFs are important as well.
While working and earning employment income, most people contribute annually to a Registered Retirement Savings Plan (RRSP). Not only do such contributions reduce your tax owing each year, but any investment growth within your RRSP from stocks, bonds, mutual funds, etc. will be tax deferred.
But what happens when you’re ready to retire and need to start drawing income from these registered investments? You may consider a life income annuity, which is an insurance contract that provides regular cash flow, or, as most people do, you can convert your RRSP into a RRIF.
How RRIFs work
Although you’re permitted to convert your RRSP into a RRIF at any time if exceptional circumstances require you to generate a cash flow, most people wait until they retire. Keep in mind that the latest you can start the conversion process is December 31 of the year you turn 71. If you retire before age 71 and don’t need to immediately access the money saved in your RRSP, it’s generally suggested that you wait and allow your plan to continue growing while also deferring your tax obligations.
Once you do decide to begin withdrawing from your RRIF, the federal government imposes a minimum amount that you must withdraw each year, reflected as a percentage of your overall RRIF assets. Consult this RRIF withdrawal schedule to determine the minimum you must withdraw, based on your age.
Key benefits of RRIFs
One of the benefits of converting from an RRSP to a RRIF is that you can keep whatever investments you may have. For example, your mutual funds will transfer from one account to another, and if you hold GICs, all terms and conditions will remain intact as you transfer the funds.
You will also continue to benefit from favourable tax treatment, as investment growth will be tax sheltered until the time you withdraw any funds. Although withdrawals are considered taxable income, since most people move to a lower tax bracket when they retire, the tax liability should be less than if you had withdrawn the money while you were still working.
If it’s to your benefit, you can base your RRIF payments on your spouse's age instead of your own. Provided that your spouse is younger, you may reduce the amount that you must withdraw annually from your RRIF, which will lower your taxes owing on these funds. Also, you may consider splitting some of your RRIF income with your spouse, to help reduce your combined tax burden.
Last but not least, you can name your spouse as the beneficiary of your RRIF. If you die first, your RRIF can be transferred to your spouse’s RRIF (or RRSP if your spouse doesn’t have a RRIF yet) on a tax-free basis. If your spouse is the beneficiary of your RRIF, this plan will not be considered part of your estate and will not be subject to related estate taxes/probate fees.
Please feel free to contact our office if you have any questions about converting RRSPs into RRIFs when you retire, or if you’d like to explore tax-saving strategies for your RRIF.
* Source: Canada Revenue Agency