RRIF: What, when and how (reducing taxes)

By Noel Moffatt

🗓️

Updated: September 27, 2024

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A Registered Retirement Income Fund (RRIF) enables retirees to withdraw from their savings, regularly. Essential in retirement planning, an RRIF helps efficiently manage your income and taxes. This article explains an RRIF, its workings and strategies to optimize withdrawals.

Key takeaways

• An RRIF allows you to withdraw income from your retirement savings while the investments grow, tax-deferred, until taken out
• Minimum annual withdrawals from an RRIF start at 4% at age 65 and can impact your tax bracket if you withdraw more than the minimum
• You must convert your RRSP to an RRIF by December 31 of the year you turn 71, though earlier conversion can provide more flexibility depending on your financial needs

Think of an RRIF like the next stage of your RRSP’s life. While the RRSP is all about growing your savings, an RRIF is about turning those savings into income you can live off in retirement.

The beauty of an RRIF? The investments inside continue to grow tax-deferred—just like an RRSP—but now, the focus is on withdrawing funds. You only pay taxes when the money comes out, so your investments get a bit more time to grow before the taxman takes his cut.

What is an RRIF and how does it work?

An RRIF works as a mechanism to draw income from investments previously accumulated in an RRSP. It’s funded from various accounts, including RRSPs, Pooled Registered Pension Plans (PRPPs), Registered Pension Plans (RPPs) and First Home Savings Accounts (FHSA). This flexibility allows seniors to consolidate their savings into a single, manageable account—or even multiple RRIFs, if you so choose.

Once the RRSP becomes an RRIF, you can’t add any more money to it. But here’s the upside: You have control over how much and how often you withdraw (as long as you meet the minimum requirement—more on that shortly). Unlike the RRSP, which was all about accumulating, the RRIF is about disbursing—and on your terms.

Oh, and here’s a pro tip: you can transfer funds from your RRIF into a Tax-Free Savings Account (TFSA) letting those funds grow, tax-free. This can be a solid strategy for keeping more of your retirement savings out of the taxman’s reach.

RRIF withdrawal rules

Withdrawals from an RRIF must start in the year following its establishment. The government sets minimum withdrawal rates that increase as you age—starting at 4% at age 65 and going up to 20% at age 95. This ensures you don’t hold onto your retirement nest egg forever (as much as you may want to).

One thing to keep in mind: These withdrawals are taxed as income, so if you’re thinking of pulling out more than the minimum, you could end up in a higher tax bracket. Careful planning is key.

RRIF withdrawal rates

See CIBC Wood Gundy for a full list of RRIF withdrawal rates by age¹

As you can see, calculating your RRIF withdrawals is straightforward. The older you get, the larger the slice you’re required to take out. This ensures you’re drawing down your retirement savings at a reasonable pace.

Let’s say you’ve got $500,000 in your RRIF at age 65. Your minimum withdrawal would be 4%, which comes out to $20,000 for the year. If you’re 75 and still sitting on that same $500,000, the minimum withdrawal jumps to 5.82%, or $29,100.

It’s helpful to know these numbers so you can budget for your retirement accordingly — and, of course, to avoid any tax surprises.

Maximum RRIF withdrawals and tax implications on excess withdrawals

Here’s the thing: There’s no maximum limit as to how much you can withdraw from an RRIF, but pulling out more than the minimum can be a tax trap. Those extra withdrawals are taxed as regular income, which could push you into a higher tax bracket. 

Not only that, but taking out too much might affect your eligibility for government benefits like Old Age Security (OAS). So, balancing your income needs with the tax implications is crucial for ensuring your retirement income isn’t eaten up by taxes.

Converting your RRSP to an RRIF

Converting your RRSP to an RRIF is an essential step in managing your retirement income. You can convert multiple types of accounts into an RRIF, including:

• Pooled Registered Pension Plans (PRPP)
• Matured and unmatured RRSPs
• Spousal RRSPs
• First Home Savings Accounts (FHSAs)

To convert, simply instruct your financial institution to transfer your RRSP assets into an RRIF and choose a withdrawal schedule that aligns with your retirement plans.

When you think about it, it’s kind of like setting up direct deposit for your retirement.

When to convert RRSP to an RRIF

By December 31 of the year you turn 71, you need to convert your RRSP. Most people choose to wait until age 71 to convert their RRSP to an RRIF because it allows them to maximize the tax-deferred growth of their investments. After all, the longer your money can grow without being taxed, the better.

However, converting earlier can also be beneficial in certain situations — it really depends on your financial needs and retirement plan. Maybe you want to start drawing income sooner, or maybe it makes sense for your retirement timeline. Finding the right balance between keeping your investments growing and managing your income is the key.

Benefits of converting RRSP to an RRIF

Converting an RRSP to an RRIF comes with a few key benefits:

• Taxes: Withdrawals are only taxed when you take the money out, so your investments keep growing without an immediate tax hit
• Income: An RRIF provides a steady stream of income throughout retirement. You won’t run out of money too fast if you plan wisely
• Pension splitting: You can split RRIF income with your spouse, which helps reduce your overall tax burden
• Transferring to a beneficiary: RRIF assets can be transferred to a spouse or financially dependent child, helping defer taxes and ensuring your family is supported

How RRIF withdrawals are taxed

RRIF withdrawals are taxable income and must be reported on your tax return. For example, if you withdraw $25,000 from your RRIF and are in a 30% tax bracket, you’ll owe $7,500 in taxes. This means the actual  money you take home is less than you think — so, plan accordingly.

These withdrawals can also affect your eligibility for government benefits like OAS, so it’s important to manage them wisely.

Ways to minimize RRIF withdrawals and taxes

Here are a few strategies to help you minimize RRIF withdrawals and reduce your overall tax burden:

• Only withdraw the minimum amount: This helps keep your taxable income low and lets your investments keep growing
• Use your spouse’s age: If your spouse is younger than you, you can use their age to calculate lower minimum withdrawals
• Withdraw from less tax-efficient sources: Prioritize accounts with higher taxes first, so your tax-deferred accounts continue growing
• Contribute excess funds to a TFSA: This allows your money to grow tax-free in another account
• Pension splitting: Sharing your RRIF income with your spouse can reduce your tax hit

For more information on RRIF taxation, visit the Canada Revenue Agency²

Can you switch brokerages to withdraw your RRIF? How can it save you money?

Switching brokerages to withdraw your RRIF is not only possible, but it can also be a real game-changer for saving on fees and improving your overall returns. Imagine this: You're paying a hefty fee at your current institution, but there's another brokerage out there offering lower fees and better investment options. Why wouldn’t you make the switch?

The process is simple. You open an RRIF account with your new brokerage, and they’ll handle the transfer from your old institution. And here’s the best part — it’s a tax-free transfer as long as your RRIF remains within registered accounts.

How it works

Switching brokerages involves transferring your RRIF from your current financial institution to another one with better perks (lower fees, better investment options or just a user-friendlier platform). The new brokerage will take care of the transfer process for you. The key is making sure it stays within registered accounts so you avoid triggering any tax implications.

How switching brokerages can save you money

Here’s where you can really rack up the savings. Different brokerages offer varying fee structures. By switching to one with lower management fees, you can keep more of your hard-earned retirement funds working for you instead of being eaten up by fees. Better investment options — like lower-cost mutual funds or ETFs — can also enhance the growth of your RRIF.

Some brokerages also offer more flexible withdrawal plans or automation, which helps you manage your retirement income more efficiently. And don’t forget — some brokerages offer sweet promotional deals that can help offset any potential transfer fees.

Things to consider before switching

Before you go all-in, check a few things first:

• Be aware of potential transfer fees from your current institution
• Make sure your current investments are liquid (meaning they can easily be transferred)
• Keep an eye on the timing of your mandatory withdrawals to avoid any penalties or delays

FAQs

Noel Moffatt Writer

Noel Moffatt Writer

Noel Moffatt is a Canadian fintech expert with a passion for simplifying personal finance. Based in St. John’s, NL, he draws on his background in finance, SEO, and writing to deliver clear explanations and actionable advice. Noel is dedicated to equipping readers with the knowledge and tools they need to make informed financial decisions, striving to make personal finance more accessible and understandable through his in-depth articles and reviews.

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