Registered Retirement Income Fund

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A Registered Retirement Income Fund (RRIF) is a tax-deferred retirement plan under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their Registered Retirement Savings Plan (RRSP). As with an RRSP, an RRIF account is registered with the Canada Revenue Agency.

Like RRSPs, RRIFs are tax-advantaged savings plans that allow gains to compound, within the plan, without attracting tax. Withdrawals from a RRIF, as with an RRSP, are taxed as ordinary income irrespective of whether they were originally characterized as capital gains, dividends, income or return of capital inside the registered account. Contributions cannot be made to a RRIF.

Creating a RRIF

You can only contribute to a RRIF by directly transferring property from a matured or unmatured RRSP[1], a Registered Pension Plan (RPP) or another RRIF. You cannot transfer any part of a retirement allowance to a RRIF.[2][notes 1]

Establishing a RRIF can be done at anytime, but must be done no later than the year that one turns 71. Once a RRIF is established, there can be no more contributions made to the plan nor can the plan be terminated except through death.[3]

It is possible to convert a RRIF back to an RRSP, if the annuitant is under the age of 71. A RRIF can be converted to an annuity at any age.[4][5][6]

The rules allow you to have more than one RRIF and RRIFs can be self-directed in a similar manner to RRSPs.

When to convert

Some investors will want to wait to the legal limit of age 71 to convert their RRSPs to RRIFs. For example, if you don't need to make withdrawals to complement other sources of retirement income, keeping the money in the RRSP will let the funds compound tax-free as long as possible.

But there may be reasons to do an earlier conversion, whole or in part, especially if you plan to make withdrawals at age 65 or later. One reason relates to the pension tax credit and pension income slitting. A non-refundable federal pension tax credit of 15% is available on the first $2000 of "eligible pension income".[7][8] Starting at age 65, eligible pension income includes RRIF withdrawals, but not lump sum RRSP withdrawals.[9][7] Thus, "it may be beneficial to convert at least a portion of an RRSP to a RRIF when the taxpayer turns 65, in order to generate income eligible for the pension tax credit, and for pension splitting."[10]

Pension income splitting is "a method for reducing the taxable income of one spouse by allocating income, on the tax return, to the other spouse".[11] Up to one half of eligible pension income can be allocated to the lower income spouse. Taxpayers can only qualify for splitting pension income if certain conditions are met, including having received income that qualifies for the pension tax credit during the year.[12] In other words, pension splitting works with RRIF withdrawals but not with lump sum RRSP withdrawals.[13]

RRIF withdrawals

No minimum withdrawal is required in the year the retirement fund (RRSP) is converted to a RRIF. In subsequent years, RRIF holders must withdraw funds in accordance with prescribed factors. These are minimum withdrawals and the annuitant may withdraw more than these amounts, if they wish to (there is no maximum).[14]

Minimum withdrawal schedule

Which age are the factors based on?

The minimum withdrawal percentages are based on the annuitant's age (or, if he/she so chooses, the spouse's age) and the value of the holdings on January 1 of each year. Your carrier calculates the minimum amount based on your age at the beginning of each year. However, you can elect to have the payment based on your spouse or common-law partner's age.[15] You must select this option when filling out the original RRIF application form. Once you make this election, you cannot change it.[16]

Current rates

The Federal 2015 Budget has reduced the minimum withdrawal factors for 2015 and subsequent years:[17][18][19]

Age of Account Holder
on January 1 		Percentage of Total RRIF
Value to be Withdrawn[17]
65 4.00%
66 4.17%
67 4.35%
68 4.55%
69 4.76%
70 5.00%
71 5.28%
72 5.40%
73 5.53%
74 5.67%
75 5.82%
76 5.98%
77 6.17%
78 6.36%
79 6.58%
80 6.82%
81 7.08%
82 7.38%
83 7.71%
84 8.08%
85 8.51%
86 8.99%
87 9.55%
88 10.21%
89 10.99%
90 11.92%
91 13.06%
92 14.49%
93 16.34%
94 18.79%
95+ 20.00%

If the age is 70 years or younger, the prescribed factor is calculated as follows: 1 divided by (90 minus the age).

Pre-1992 RRIFs

Slightly different factors were used for RRIFs that were created prior to 1992;[20] starting in 2015 all plans use the same factors.[17]

LIFs and LRIFs

The withdrawal schedule above also applies to minimum withdrawals from Locked-In Retirement Fund (LRIF) or a Life Income Fund (LIF). These also have maximum withdrawals, however, unlike RRIFs.

In-kind withdrawals

It is possible to withdraw a security from a registered fund "in-kind:" that is, without selling it first.[21] The security can be transferred to a non-registered account or to a TFSA if contribution room is available.[21]

If an in-kind withdrawal is made, it must be at fair market value and there must be sufficient cash in the registered plan to cover any withholding tax. In a non-registered acccount, the fair market value applicable to the transfer will become the adjusted cost base of the security.[21]

Investors facing forced withdrawals at reduced market prices may wish to consider an in-kind withdrawal if they do not wish to sell a security, but are forced to make a withdrawal to meet the minimum withdrawal requirements.

Withholding tax on payments from a RRIF

If you withdraw more than the "minimum amount", the amount above the minimum is subject to withholding tax, i.e. a deduction at source.[22] Note that this is not a special tax or a different tax from regular income tax. Amounts withheld will "show on your tax return as taxes already remitted".[23]

Withholding rates

The federal withholding rates on RRIF payments above the minimum are[22]:

  • 10% (5% in Quebec) if the payment is not more than $5,000
  • 20% (10% in Quebec) if the payment is more than $5,000 but not more than $15,000
  • 30% (15% in Quebec) if the payment is more than $15,000

In Quebec, there is also a 15% withholding from the province on "the payment from a RRIF that exceeds the minimum amount", for single payments only.[24] This will go down 14% on July 1st, 2023.[25] For periodic payments, the RRIF carrier has to use the so-called "usual method" to calculate the withholding rate.

How much should you take out?

Many people withdraw only the yearly minimum, to make sure that their RRIF lasts as long as possible, and to avoid triggering an OAS clawback or changing tax brakets.

On the other hand, in some specific cases, depending on tax rates, investment returns, longevity and other factors, it could be financially advantageous to take out more than the minimum, if TFSA room is available to place the extra funds.[26][27]

RRIF rollovers upon death of spouse

CRA[28] advises: You can contribute to your RRIF any amounts you receive or are considered to have received from a deceased annuitant's RRSP if:

  • the annuitant under an RRSP dies and, at the time of death, you were the deceased annuitant's spouse or common-law partner;
  • you were a financially dependent child or grandchild of the deceased annuitant who depended on the annuitant because of a physical or mental infirmity. If this is the case, you may be able to transfer the amount even if the deceased annuitant had a spouse or common-law partner at the time of death.

CRA [29] further advises: before any payments are made under the fund, the annuitant has to elect to use the prescribed factor corresponding to the age of the spouse or common-law partner when calculating the minimum amount. Once the election is made, it cannot be changed, even if the spouse or common-law partner dies. However, the annuitant can establish another RRIF by transferring funds and then make a new election for this other RRIF.

RRIF investing

Eligible investments

The types of investments that are permitted in a RRIF are the same as those permitted in a RRSP.[30] Common types include:

Types of RRIF accounts

A self-directed RRIF is the continuation of a self-directed RRSP. Most discount brokerages in Canada offer self-directed RRIF accounts. This type of account offers a wide selection of investment options (almost all of the eligible investments listed above), they are popular with DIY investors on the Financial Wisdom Forum, but you must "feel comfortable making all the investment decisions yourself".[31]

The Ontario Securities Commission lists four other types of RRIF accounts:[31]

  1. guaranteed interest RRIF (e.g., Guaranteed Investment Certificates from a bank);
  2. mutual fund RRIF (i.e. a mutual fund account from a bank or mutual fund company);
  3. segregated fund RRIF (similar to mutual funds but from an insurance company; offers guarantees in exchange for higher fees);
  4. fully managed RRIF (with discretionary investment management by an advisor).

Investment strategies

A RRIF account should be considered part of a larger portfolio, along with TFSAs, non-registered accounts, etc. This overall retirement portfolio should ideally be managed according to an investment policy statement, which includes an asset allocation. The main asset classes to consider are cash, fixed income and equities.

When evaluating an appropriate asset allocation for a retiree, other sources of retirement income must be considered (Old Age Security, CPP/QPP, workplace pensions, etc.). Approaching retirement, retiring, or converting your RRSP to a RRIF, can be good times to re-evaluate your risk tolerance and asset allocation.

For example, cash can play a larger role when making withdrawals than during the accumulation phase. There are two reasons for this: (1) cash can be part of a more conservative asset allocation; (2) it can be used to fund withdrawals when other more volatile investments, such as stocks, are temporarily down.[32][33] This is sometimes called a "cash wedge".

Implementation of the chosen asset allocation is covered in portfolio design and construction.

Income investing versus total return

A very conservative investment strategy for retirees is to try spending only the income and not touching the "capital". But when interest rates and dividend yields are low, a diversified portfolio of stocks, bonds and cash is unlikely to generate enough income to cover the minimum RRIF withdrawals listed above, which start at 4% at age 65 and increase thereafter. This may unwisely entice some retirees to "reach for yield", i.e. choose riskier investments because they offer higher current yields.

Instead, a total return approach looks at interest, dividends, but also growth of the portfolio (unrealized capital gains). If the total return is high enough, it is possible to sell some investments every year within the RRIF to meet the mandatory withdrawals, without prematurely depleting the RRIF, especially if some of the withdrawals are reinvested in a different account (e.g., TFSA, non-registered) rather then spent.

Retirement income planning

Retirement income planning and management can be a complex topic and investors might wish to consult a financial planner, if only to validate their plans.

See also articles in finiki's Retirement planning category

Annuity conversion

A RRIF may be (permanently) converted to an annuity at any time, in part or completely. An annuity eliminates longevity risk by guaranteeing a lifelong income.

Whether to convert a RRIF to annuity eventually, or even choosing an annuity immediately when a RRSP matures (instead of a RRIF), can depend on factors such as:[34]

  • desire for flexibility
  • investment risk tolerance
  • other sources of guaranteed income
  • life expectancy
  • bequest motive

See the annuity article for more discussion.

Notes

  1. ^ A retirement allowance, also known as a retiring allowance, is "an amount you receive on or after retirement from an office or employment in recognition of long service. It includes payment for unused sick leave and amounts you receive for loss of office or employment, whether as a payment of damages or a payment under an order or judgment of a tribunal".

References

  1. ^ Canada Revenue Agency, Property from an unmatured RRSP, viewed February 2, 2014.
  2. ^ Canada Revenue Agency, Transferring to your RRIF, viewed February 2, 2014.
  3. ^ Canada Revenue Agency, Registered Retirement Income Fund (RRIF), viewed February 2, 2014.
  4. ^ See paragraph 50 "Purchase of an annuity" in IC 78-18R6 Registered Retirement Income Funds, Canada Revenue Agency, March 6, 2002, viewed March 24, 2018. See also paragraph 9 in the same document.
  5. ^ Financial Wisdom Forum, Convert RRIF to Annuity, contains discussion of IC 78-18R6.
  6. ^ Canada.ca, Registered retirement income fund (RRIF) – Transfer of excess amounts and property, viewed March 24, 2018.
  7. ^ a b TaxTips.ca, Line 31400 Pension Income Amount Tax Credit, viewed December 12, 2021.
  8. ^ MoneySense, Understanding the pension income tax credit, January 15, 2014, viewed December 12, 2021.
  9. ^ Canada Revenue Agency, Can you claim the pension income amount?, viewed December 12, 2021. Note that the list of eligible pension income includes box 16 from the T4RSP slip, but that consits of annuity payments, not lump sum withdrawals.
  10. ^ TaxTips.ca, Registered Retirement Income Fund (RRIF), viewed December 12, 2021.
  11. ^ TaxTips.ca, Pension Income Splitting, viewed December 12, 2021.
  12. ^ Canada Revenue Agency, Eligible pension income, viewed December 12, 2021.
  13. ^ TaxTips.ca, Converting Your RRSP to a RRIF, viewed December 12, 2021.
  14. ^ Ontario Securities Commission, How to make RRIF withdrawals, updated October 4, 2023, viewed October 22, 2023.
  15. ^ Canada Revenue Agency, Receiving income from a RRIF, viewed August 16, 2012.
  16. ^ Canada Revenue Agency, Yearly minimum amount from a RRIF, in T4040 RRSPs and Other Registered Plans for Retirement, viewed December 6, 2021.
  17. ^ a b c "Prescribed Factors for Minimum Annual Withdrawal From a RRIF". TaxTips.ca. Retrieved 2015-05-29.
  18. ^ See Table A5.2 in the 2015 Federal budget
  19. ^ CRA, T4RSP and T4RIF information returns, Chart – Prescribed factors, viewed December 7, 2021. Note that IC78-18R6, cited elsewhere in this article, still gives the pre-2015 percentages.
  20. ^ Canada Revenue Agency, IC 78-18R6 Registered Retirement Income Funds, viewed December 6, 2021. Expanded for ages from 50 to 70.
  21. ^ a b c TaxTips.ca, Making "in-kind" withdrawals from an RRSP or a RRIF, viewed March 6, 2009.
  22. ^ a b Withholding Tax on Payments from a Registered Retirement Income Fund (RRIF), viewed December 6, 2021.
  23. ^ TaxTips.ca, What Tax is Deducted From RRIF or RRSP Withdrawals?, viewed December 6, 2021.
  24. ^ Revenu Québec, Payments From an RRSP, a VRSP, a PRPP or a RRIF, viewed December 6, 2021.
  25. ^ Revenu Québec, Source Deductions of Income Tax to Change On July 1, 2023, viewed June 15, 2023.
  26. ^ Doug Chandler, Retirement drawdown choices; RRIF, TFSA and Non-registered Accounts, October 2022, viewed October 21, 2023.
  27. ^ Owen Winkelmolen, Why you might want to withdraw more than the RRIF minimum, undated but probably 2021, viewed October 21, 2023.
  28. ^ Amounts paid from an RRSP or RRIF upon the death of an annuitant, viewed November 17 2013.
  29. ^ Registered Retirement Income Funds, viewed November 17, 2013
  30. ^ Canada Revenue Agency, Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs, viewed December 11, 2021.
  31. ^ a b Ontario Securities Commission, How to open a RRIF for retirement income, updated October 4, 2023, viewed October 22, 2023.
  32. ^ Morningstar, Six key guidelines for RRIF investors, February, 26, 2018, viewed October 21, 2023.
  33. ^ MoneySense, Maintaining your asset allocation while you draw down funds from a RRIF
  34. ^ MoneySense, RRIF or annuity: Which one is right for you?, March 22, 2016, viewed December 11, 2021.

Further reading

External links

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