How Does a RRIF Work? The Complete 2022 Guide

If there’s one thing to say about Canada, it’s that it gives residents (especially retirees) ample opportunities to save. After meticulously researching RRSPs, TFSAs, RSPs, RESPs, and annuities, the time has come to talk about RRIFs. 

But how does a RRIF work? Stick around to find all the answers right here!

How Does a RRIF Work?

So what is a RRIF

A Registered Retirement Income Fund (RRIF) is an arrangement between you and a financial institution (carrier), whereby the institution agrees to make periodic payments to you after you’ve transferred property from a RRSP, SPP, PRPP, RPP, or another RRIF and have turned 71 years old.

If you have your money saved in a RRSP, you’ll need to withdraw the full amount after you turn 71 or turn it into an annuity or RRIF to ensure you’re getting the funds in a tax-efficient way. RRIFs pay you the income throughout your retirement years and shelter you from unnecessary taxes. 

RRIFs allow you to hold a variety of investments, such as:

  • Bonds
  • Stocks
  • Mutual funds
  • ETFs
  • GICs
  • Stock exchange securities

The carrier is usually an insurance company, trust company, credit union, or bank, and pays you a minimum amount in the year following the one in which you entered into a RRIF. The earnings in your RRIF are tax-free, while the amounts paid out of it are taxable on receipt.  

If the idea of a financial institution controlling your assets doesn’t appeal to you, you can consider investing in a self-directed RRIF account. This way, you can make investment decisions yourself and manage your own investment portfolio

Because you transfer a RRSP to a RRIF, many people confuse the two. However, there are some fundamental differences between them, which I’ll discuss below

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How to Set Up a RRIF?

As I already mentioned, you can set up a RRIF through a financial institution of your choice. All you need to do is simply visit a local branch and tell an employee that you’re looking to open an account. Before deciding on where you should do so, ask the institution which types of RRIFs they support and what investments they can contain.  

If you wish, you can have more than one RRIF. But before taking on additional responsibilities, I implore you to talk to a financial advisor to help you manage your accounts and RRIF payment

How Much Do You Need to Withdraw Each Year?

Now, let’s talk about the RRIF withdrawal. Since the rules regarding withdrawing can be complex, I’ve included all essential information. 

RRIF Withdrawal Rules

Although you’ve already read some general rules, here is all you need to know about withdrawing from RRIFs:

  • You must start withdrawing the year following the one in which you opened your RRIF account (if you opened it in 2021, you must withdraw sometime in 2022)
  • You can choose withdrawal amounts as long as it’s above the minimum annual withdrawal
  • You can set up your RRIF with withdrawal periods that work best for you (monthly, quarterly, semi-annually, annually) and that depend on the financial institution
  • The funds you withdraw from your RRIF count as taxable income for the year
  • You can withdraw more, but not less than the minimum payout
  • Contributions are not allowed in RRIFs

As previously mentioned, you receive a yearly minimum amount from your RRIF. The amount you get depends on your carrier’s calculations and is based on your age at the beginning of each year. If you want, you can also ask the carrier to base the RRIF payment on your spouse or common-law partner’s age. 

Since every annuitant receives a set amount of money upon each withdrawal, it’s essential for you to know how much to expect. If you choose, you can calculate the annual minimum withdrawal yourself by following this formula:

But if you don’t trust your math skills, you can take advantage of a RRIF withdrawal calculator, that will estimate the minimum monthly and annual income withdrawal you can receive. 

If you want to withdraw more than the minimum amount, you should pay a withholding tax on the excess. Thus, your amount is subject to tax deductions at source using withholding rates, whose estimates are listed here

Death of a RRIF Annuitant

If an annuitant has died, the amounts received from a RRIF upon the death can be transferred to the RRSP, RRIF, PRPP, or SPP of a qualified RRIF beneficiary. If the beneficiary is a financially dependent child or grandchild, they can be eligible to receive the amount even if the annuitant had a spouse or common-law partner at the time of death. 

To transfer premium refunds to another RRSP, the beneficiary must be less than 71 years old at the end of the year when the transfer is made. 

If there is an increase in the value of a RRIF between the date of death and final distribution, the beneficiary should include this in the income for that year, using the T4RIF slip

If there is a decrease in the value, a legal representative can ask for the amount to be deducted from the deceased’s final tax return. 

RRIF vs RRSP

Finally, let’s clear the confusion surrounding the differences between a RRSP and a RRIF. 

At the crux of it, a RRSP is a tax-free savings plan that allows you to retire comfortably. If you have a RRSP account, you will be making regular tax-free contributions to it throughout your working life, thus investing for your retirement in the future. Then, when you withdraw the funds, you pay taxes. 

However, a RRIF is thought to be an extension of an RRSP. Namely, the year after you turn 71, you can no longer contribute to your RRSP, but you also might not want to withdraw all your assets. Therefore, by converting the RRSP to a RRIF, you can transfer your investment tax-free. 

Remember that, unlike a RRSP, you cannot contribute to a RRIF. 

If you’re nearing retirement, you should focus on transferring your RRSP to another savings plan (in this case – a RRIF) by December 31 of the year in which you turn 71. So, if your 71st birthday is in 2023, you’ll need to convert your RRSP by December 31, 2023. 

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Conclusion

Now that you’ve gathered all the necessary information about what a RRIF is, how does a RRIF work, and what’s the difference between a RRSP and a RRIF, you’re well-equipped to make smarter decisions about your retirement savings. 

Don’t wait around, start saving!

FAQ

What is a RRIF in Canada?

A RRIF is a retirement savings plan that you can set up with a financial institution, which allows you to withdraw money from your RRSP after you turn 71. You are required to make minimum withdrawals each year from your RRIF, which are set by the government.

How do I avoid paying taxes on a RRIF?

Unfortunately, you can’t completely avoid paying taxes when withdrawing money from your RRIF, as all withdrawals are fully taxable.

When do you have to convert RRSP to RRIF?

Converting a RRSP to a RRIF must be done by December 31 of the year in which you turn 71. If you miss the deadline, the funds in your RRSP will be considered taxable income for the year. 

What happens to RRIF when you die?

When the RRIF annuitant dies, the amount received from the RRIF can be transferred to the RRSP, RRIF, PRPP, or SPP of the beneficiary. Additionally, the beneficiary can also buy an eligible annuity.

ABOUT AUTHOR

When Angela combined her deep-seated love for linguistics with her growing interest for finance and money management, she struck a gold mine. She’s scoured the internet far and wide for all things related to money and finances, including payments, budgeting and investing. Now she’s eager to share her knowledge and skills with the world, determined to make it a better place. In her free time, she loves to read a good book.

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