Retirementize

Optimize Your Retirement

Home Plan Dashboard Budget Savings Forecast OAS Clawback Blog

What is a RRIF?

Picture this: You've been diligently squirreling away money in your Registered Retirement Savings Plan (RRSP) for years. Now retirement is on the horizon, and you're wondering, "How do I actually use this money I've saved?" There where the Registered Retirement Income Fund, or RRIF come into play. (RRIF is usually pronounced "riff".)

A RRIF is a way to transform your RRSP savings into a steady stream of income during retirement. Your investments continue to grow tax-free inside the RRIF, just like they did in your RRSP. Most importantly, the RRIF allows you to withdraw your income without withholding taxes.

Who Needs a RRIF? (Spoiler: Probably You!)

If you've been contributing to an RRSP, chances are a RRIF is in your future. Here's who should be paying attention:

  • The "It's Time to Retire" Crowd: By law, you need to convert your RRSP into some form of income by the end of the year you turn 71. A RRIF is often the go-to choice for many.
  • Tax-Savvy Seniors: If you like the idea of continuing to defer taxes on your investment earnings, a RRIF might be your cup of tea.
  • Flexibility Fans: Unlike some other options like annuities, RRIFs give you control over how much you withdraw each year (as long as you meet the minimum).

The Big Difference: RRSP vs RRIF Withdrawals

Now, here's a crucial tidbit that might make you sit up and take notice. There's a significant difference between withdrawing from your RRSP and your RRIF, and it all comes down to taxes.

RRSP Withdrawals: The Tax Man Cometh Early

When you withdraw from your RRSP before converting it to a RRIF, the government wants its share right away. They apply a withholding tax upfront, which works like this:

  • For withdrawals up to $5,000: 10% withholding tax (except in Quebec)
  • For withdrawals between $5,001 and $15,000: 20% withholding tax
  • For withdrawals over $15,000: 30% withholding tax

So, if you withdraw $1,000 from your RRSP, you'll only receive $900 in your pocket, with $100 going straight to the taxman. Ouch!

RRIF Withdrawals: A Tax-Friendly Approach

Here's where RRIFs shine. When you withdraw from your RRIF, there's no withholding tax on the minimum required withdrawal amount. That's right, you get the full amount!

Let's say your minimum required withdrawal is $30,000 for the year. If you take out exactly $30,000, you'll receive the full $30,000. No immediate deductions!

However, keep in mind:

  • If you withdraw more than the minimum, the excess amount is subject to withholding tax.
  • All RRIF withdrawals are still considered taxable income, so you'll need to report them on your tax return.

Here’s the breakdown of the withholding tax rates for amounts above the minimum withdrawal:

  • Up to $5,000: 10% withholding tax (5% in Quebec)
  • $5,001 to $15,000: 20% withholding tax (10% in Quebec)
  • Over $15,000: 30% withholding tax (15% in Quebec)

This tax-friendly approach of RRIFs gives you more control over your cash flow and can make budgeting in retirement a bit easier.

Ok, so you ask the question, "Why does it matter if I pay the taxes up-front with an RRSP withdrawal, or when I file my taxes with a RRIF withdrawal?" The answer is CASHFLOW. In retirement we try to take out only what we need. If you need $1,000 and only get $900, then you will need to withdraw $1,111 to get $1,000. Moreover, taking out more than you need will increase your taxes at the end of the year. This is a big deal!

When Should You Jump on the RRIF Bandwagon?

While the government says you must convert your RRSP to a RRIF (or another option) by the end of the year you turn 71, you don't have to wait that long. Here are some reasons you might want to get the RRIF party started earlier:

  • You need some extra income but don't want to fully retire yet.
  • You're in a lower tax bracket now and want to take advantage of it.
  • You're entering the "slowing down" phase of retirement and want to balance your income needs with tax efficiency.

Remember, there's no one-size-fits-all answer. Your retirement journey is as unique as you are!

How Do You Actually Use a RRIF?

Once you've set up your RRIF, using it is pretty straightforward. Here's the lowdown:

  1. Set it up: Roll over your RRSP into a RRIF at your financial institution.
  2. Choose your schedule: Decide how often you want to receive payments – monthly, quarterly, or annually.
  3. Meet the minimum: Each year, you're required to withdraw a minimum amount, which increases as you get older.
  4. Flexibility on the rest: If you need more than the minimum, you can withdraw extra (but keep an eye on those taxes!).

That's it! Your investments will keep growing inside the RRIF, and you'll have a steady stream of income to fund your retirement dreams.

Start Your Retirement Planning Today!

Whether you're 55 or 70, it's never too early (or too late) to think about how you'll turn your RRSP into retirement income. And remember, a RRIF is just one option. Talk to a financial advisor to figure out the best approach for your unique situation.

Want to get a sneak peek at how your retirement income might shape up? Try our Retirement Income Calculator and see how all the pieces of your financial puzzle fit together.