Did you know that the money you contribute to your Registered Retirement Savings Plan (RRSP) can’t stay there forever? That’s right. When you turn 71 years old, you will need to move that money. This doesn’t mean you will be forced to take out your RRSP savings all at once and pay a huge tax bill on it. Instead, you will need to convert those hard-earned retirement savings into a retirement income. Most Canadians choose to move their retirement savings into a Registered Retirement Income Fund, or RRIF.
But what is an RRIF? How does it work and why do you need one? Below are the answers to many common questions I receive about RRIFs. But, don’t forget if you have other questions or would like to learn how an RRIF might be used in your particular instance, you can give me a call any time at 705-315-0516 or book a free consultation with me by clicking here.
What is an RRIF?
An RRIF is essentially a continuation of your RRSPs, but with a big difference. You can’t make contributions to your RRIF; you can only make withdrawals. That’s because RRIFs are designed to provide a source of ongoing retirement income for you when you are in retirement.
An RRIF is an arrangement you make between you and your carrier. A carrier can be an insurance company, a trust company, or a bank that is registered by the Canadian government. You transfer property (read money) from an RRSP (registered retirement savings plan), a PRPP (pooled registered pensions plan), an RPP (registered pension plan), an SPP (specified pension plan), or from another RRIF, and the carrier provides you with the payments (or deposits into your bank account).
The minimum amount must be paid to you in the year following the year the RRIF is entered into. Earnings in an RRIF are tax-free and amounts paid out of an RRIF are taxable on receipt. This means that if you are paid $10,000 a year from your RRIF, you will pay income tax on that $10,000 come tax season.
How does an RRIF work?
You can open an RRIF anytime, but no later than the end of the year you turn 71.
How is an RRIF set up and how does it work?
- You transfer assets in: You transfer funds from your RRSP or other registered pension plans into your RRIF. Once you have transferred the funds into your RRIF, you can no longer make contributions.
- Keep your savings tax-sheltered: Just like an RRSP, the money in your RRIF can continue to grow tax-free. What’s great about an RRIF is that you have the flexibility to tailor your plan to meet your financial needs.
- Make withdrawals from your RRIF: Every year, you are required to take out a minimum amount from your RRIF. The RRIF minimum payout percentage depends on a person’s age. As a person gets older, their minimum payout percentage increases.
Similar to withdrawals from an RRSP, withdrawals from an RRIF are taxable, and there is no maximum withdrawal limit. Once you have contributed to your RRIF by transferring funds from your RRSP or other savings plan, you cannot contribute any more to your RRIF. However, you can have more than one RRIF.
Why do you need an RRIF?
There are many reasons why a person chooses to use an RRIF as a way of growing and accessing their retirement funds:
- Flexibility: RRIFs have an immense amount of flexibility, giving you more options when creating your retirement plan. For example, you may want to take out more money in your earlier years of retirement and as you get older, reduce the amount you withdraw. Or, due to unplanned medical expenses, you can choose to take out more to cover those payments.
- Tax-sheltering: If you want to continue to see your retirement savings grow, your RRSP savings can continue to do so tax-free. You may be retired for 20-30 years, so for many Canadians, it’s essential to have a plan where you can continue to invest your money.
- Transferrable: You may reach a point in your retirement where a steady stream of income becomes more important than investing your money. If so, you can transfer your assets from your RRIF to an insurance company to purchase an annuity.
What happens to the money in my RRIF if I pass away?
With any major life changes, you should have a will in place so you can ensure that your assets and property are bequeathed to the right people. With your RRIF, you can list your spouse as a beneficiary. When you pass away, your funds from your RRIF can be transferred to your spouse’s RRIF or RRSP.
Want to learn more about RRIFs? Let’s chat!
RRIFs are the next step after the RRSP comes retirement and can be very beneficial to you but, can also be very confusing at the same time. I’d love to help answer all of your questions. With my experience as a professional financial advisor and a mortgage broker, I can help you create a retirement financial plan that works for you today, and in the future. So that, when you do retire, there will be less to worry about in terms of your income or your financial future.