10 Things you need to know about RRIFs
Written by Jim Yih
A RRIF is a Registered Retirement Income Fund. If you are nearing the age where you will be looking at converting your RRSPs to income, you should consider the RRIF as an option. RRIFs are the preferred income vehicle today because they offer more flexibility over annuities. Here are 10 things you need to know when converting your RRSPs to RRIFs:
1. RRIFs are income plans. Unlike the RRSP, the RRIF is an income plan and not a savings plan. You only need a RRIF if you want to withdraw regular periodic income. If you are less than 71 and you need periodic income (once in a while) over regular income (monthly), you might have more flexibility leaving the money in an RRSP and just making a withdrawal from time to time.
2. You must convert RRSPs to income by age 71. Even if you do not need periodic income or any income at all, you must convert the RRSP into income in the year you turn age 71. Converting to a RRIF will subject you to the minimum income rules but you do not have to start income until the year you turn 72. Technically, at 71, your minimum income is $0 because there was no value to the RRIF at the end of the previous calendar year.
3. You cannot contribute to a RRIF. If you have a RRIF and you want to make an RRSP contribution, you cannot contribute directly to the RRIF. Instead you must contribute to the RRSP, prior to age 71 and then convert the RRSP to the RRIF. You cannot have a RRSP after the age of 71.
4. There is a minimum income formula. The minimum income is the lowest amount of income you can take from your RRIF. The minimum income amount is the December 31 balance from the previous year times 1 over 90 minus your age. This formula applies until age 71 at which time the government has an imposed schedule for minimum income.
5. Minimum income can be based on a younger spouse’s age. For maximum tax deferral, you want to take out as little as possible from your RRIF for as long as possible. One of the ways to stretch the income is to base the minimum income on a younger spouse’s age. This will allow you to withdraw less out of the RRIF if you do not want the income nor want to pay income tax on the income. This option can not be changed.
6. Understand the beneficiary designation. Under the current rules, if you name your spouse as the beneficiary of the RRIF, the plan can be transferred to the spouse without triggering tax. If the surviving spouse is over the age of 71, the RRIF must be transferred to a RRIF. If the surviving spouse is less than 71, the RRIF can be converted back to an RRSP, or RRIF. At the time of application, you can also designate the beneficiary as a successor annuitant, which means the payments will simply continue onto the surviving spouse without liquidation of assets. Other than some provisions made for dependent children and beneficiaries under the age of 18, any beneficiary other than the spouse will cause the entire value of the RRIF to come into income to the estate.
7. RRIFs are very flexible. The biggest advantage of the RRIF is tremendous flexibility. You have the flexibility to choose your investments, how much income you want and how frequent that income is paid to you. You also have the flexibility to make changes should your circumstances change. The RRIF is a wonderful planning tool because the flexibility allows you to customize to your specific needs and circumstances.
8. Watch the attribution rules. If the RRIF is being set up with spousal RRSP money, you must be aware of the attribution rules. If any contribution has been made to any spousal RRSP with any institution in the year of income or the two preceding years, there will be attribution of income to the original contributor. This attribution only applies to amounts in excess of the minimum income. If you need income but want to avoid attribution, you can withdraw just the minimum.
9. RRIF income may be subject to withholding tax. Even though all RRIF income is fully taxable, only the amounts withdrawn in excess of the minimum are subject to withholding tax at source. Withholding tax is simply the amount of tax you prepay to the government. The more withholding tax, the less you will have to pay in the future. Less withholding might mean you would owe more down the road. Withholding taxes in all provinces expect Quebec are 10% for amounts withdrawn up to $5000, 20% for amounts between $5001 and $15,000, and 30% for amounts greater than $15,000. To minimize withholding taxes, you may want to consider withdrawing a number of withdrawals less than $5000 each time.
10. RRIFs qualify for the $2000 pension income credit. If you are over the age of 65 and you do not have a company pension plan, you may be able to withdraw $2000 per year of income from the RRIF tax-free.