Part of the retirement process involves switching from saving for retirement to living in retirement. So what, exactly, do you need to do to turn your retirement savings into a retirement income? One of the ways to do this is through a Registered Retirement Income Fund (RRIF).
What is a Registered Retirement Income Fund?
A Registered Retirement Income Fund (RRIF) works like a Registered Retirement Savings Plan (RRSP) in reverse. Instead of putting money into an RRSP to save for retirement, you withdraw money from your RRIF to provide you with income after you retire. You don’t pay tax on the money in your RRIF until you withdraw it as income.
How does an RRIF work?
By converting your existing RRSPs to an RRIF, you position yourself to receive income payments for the remainder of your life. RRIFs are highly flexible and allow you to:
- Decide how often and how much you wish to take out of the plan, subject to the minimum requirements.
- Decide which investments to hold under your RRIF plan.
- Decide when to collapse the plan.
- Consider tax and estate planning.
All payments from a RRIF are added to your taxable income for the year in which you take a payment. Taxes are withheld at the time of withdrawal on any amount withdrawn over the minimum required amount.
How much can I withdraw as annual income?
The Federal Government has established a schedule of minimum amounts that must be withdrawn from the RRIF each year following the year that the RRIF is established. But you can always withdraw more than your minimum. You can also reduce the annual minimum withdrawal amount by basing it on the younger spouse’s age. However, once you have elected to base the payment on the younger person’s age, you cannot change this designation in the future.
RRIF income received after age 65 is also eligible for pension income splitting between you and your spouse, which could have tax saving advantages. Retirement income can come from a number of sources: Canada Pension Plan, employer pension plans, Old Age Security, non-registered investments, part-time employment, and the conversion of RRSP savings. All these sources should be taken into consideration when determining your annual withdrawals. Your financial advisor or investment specialist can help you determine what your minimum annual withdrawals will be.
How do I know if a RRIF is right for me?
It is recommended that all RRSP plan holders convert at least a portion of the funds in their RRSP to an RRIF when planning their retirement income. RRIFs allow your funds to grow tax-sheltered even while you are receiving your minimum annual payment.
If you agree with any of the following statements, an RRIF is probably a good choice for you:
- I want to have input as to how my funds are invested.
- I want to decide how much I withdraw each year, and this amount may change from year to year.
- I want my funds to last for my entire retirement.
- I want to defer the taxes on my RRSP by converting the funds to a RRIF.
- I want to leave some of my savings for my estate.
- I want to add to my retirement income.