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What Do I Need to Know About RIFs?

Written by Joe Snyder

Friday, November 17th, 2017

Q:

What Do I Need to Know About RIFs?

 

A:

 RIF withdrawals are taxed similar to RSP withdrawals, with one significant exception: There is no up-front withholding tax on the minimum required annual withdrawal amount.

Let's look at RIFs in a bit more detail.

Why RIFs?

A Registered Retirement Income Fund (RRIF or RIF) is an account registration type that is primarily used to draw down on your (RSP) savings during retirement. RIFs are effectively the opposite of RSPs – RSPs are used during the accumulation (saving) phase, whereas RIFs are used during the spending (retirement) phase, along with other sources of income you might have.

RSP to RIF Conversion

You've worked and saved for decades, and now you're ready to retire. Old Age Security (OAS) and Canada Pension Plan (CPP) payments don't normally cover people's expenses or allow them to do everything they'd like to in retirement. Enter your RSP savings. By the end of the year in which you turn 71, you'll need to do something with any RSPs you have.

Here's a list of your options, including doing a combination of any of the below:

1) Open a RIF and transfer the proceeds of your RSPs into the RIF

2) Use your RSP savings to purchase an annuity

3) Withdraw the funds from your RSP (i.e. deregistration)

RIF Setup

It's important to note that just because you can no longer hold RSPs after age 71, it doesn't mean that you can't convert to a RIF sooner. Also, when you set up a RIF, you're given the option of basing the payments on your age or the age of a younger spouse (if applicable). The rationale for choosing a younger spouse is that the younger the age used to calculate the minimum withdrawal, the lower the required minimum annual withdrawal amount (i.e. you get to leave more of your RIF savings in your account enjoying deferred taxation).

RIF Withdrawals

RIFs allow tax-deferred growth, just like RSPs do. As long as the money remains in your RIF, any growth is tax-deferred until withdrawal. But all of that RSP and RIF tax deferral (as well as tax deductions you received for your RSPs along the way) eventually catches up to you – because now you have to start withdrawing. Every year, there's a mandatory minimum withdrawal amount, starting at just under 5.50% if your first withdrawal is when you're 72. Note: there's no maximum withdrawal amount.

RIFs and Taxes

You'll receive a T4RIF for any withdrawals (similar to a T4RSP for any RSP withdrawals), and will need to report this income on your tax return. There's no up-front withholding tax on the minimum annual withdrawal amount. Any amount withdrawn above the minimum annual amount is subject to withholding tax following the same schedule as RSPs.

One strategy for retirees who don't need to use the entirety of their RIF withdrawals is to immediately funnel the extra cash into a Tax-Free Savings Account, thereby sheltering their growth from additional taxation.

Final Thoughts

The ability to defer tax on the growth of your RIF is a key benefit that should keep them high up on the consideration list when determining what to do with your RSPs at retirement. While annuities and the promise of guaranteed income for life sounds ideal, there's more flexibility with RIFs. But as with many things related to investing, there's no one-size-fits-all solution, and it's likely that a combination of the two is probably the ideal choice.

 


If you have a question Joe can answer in a future article or have a topic suggestion, please email it to: askanadvisor@tangerine.ca

This article is intended to provide general information only about RIFs. If you need further information about your specific circumstances, you should speak to an investment advisor.

 

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