Maximizing cashflow during retirement means using a combination of investment vehicles. While RRSPs are a commonly used tool towards that goal, it logically follows that most retirees will eventually own a RRIF. RRIFs are similar but have their own unique features.
RRSP vs RRIF
A Registered Retirement Income Fund (RRIF) is essentially a continuation of a Registered Retirement Savings Plan (RRSP). This account conversion or “rollover” can be done at any age but does become mandatory during the year the RRSP account holder reaches age 71, the same age after which RRSP contributions are no longer permitted. This is what we call “aging out” of the RRSP.
After “aging out” of an RRSP, there are 3 options:
- Withdraw all funds on which taxes will be withheld
- Taxes are not withheld when the funds are used to purchase an annuity
- Taxes are not withheld when the funds are “rolled over” to a RRIF
Withdrawing from a RRIF
Like an RRSP, the money in a RRIF continues to be invested and growth is tax sheltered until funds are withdrawn. For RRIF owners over the age of 71, a minimum amount must be withdrawn annually. This minimum is equivalent to a percentage of the RRIF value and this percentage may change year-to-year. A current CRA chart of minimum %’s can be found here. There is no maximum RRIF withdrawal, making it more flexible than many other investment options.
Investors who convert their RRSPs to RRIFs at ages younger than 71 also have the freedom to make RRIF withdrawals. But the minimum withdrawal % is determined by a formula based on age, not the current chart rates.
Why the fuss over minimum withdrawal rates? Because minimums aren’t subject to withholding taxes. Amounts withdrawn in excess of the minimum do require that taxes be withheld; those withholding rates are tiered and dependent on the amount of the excess withdrawal. RRIF owners can even request that tax be withheld at higher rates in order to reduce or eliminate tax time liability.
So while an RRSP is designed to receive contributions, a RRIF is designed to be used only for withdrawals, with very limited exceptions. Though important, we do realize all of this information is a little dry. At the very least, we hope you’ve acquired some new language to throw back at your kids and grandkids when you don’t understand half the words they use: “…by the time you age out of your RRSP and need to rollover to a RRIF…”.
We continue on the topic of RRIFs in our next blog post.