Mandatory Withdrawals – RRIF 101
Mandatory account withdrawals – sounds fierce but that’s what a Registered Retirement Income Fund (RRIF) is partly about.
This is my favourite definition for a RRIF: it’s like a Registered Retirement Savings Plan (RRSP) in reverse.
Here’s my primer about RRIFs for today’s post.
- You can choose the types of investments to hold in a RRIF; individual stocks, Exchange Traded Funds (ETFs), mutual funds and more. In fact, you can hold the same assets inside your self-directed RRSP as your RRIF.
- You don’t have to start a RRIF when you retire but you must collapse your RRSP in the year you turn age 71, so rolling RRSP investments into a RRIF is one option for you.
- Like the RRSP, you don’t pay any tax on the money earned from investments inside the RRIF.
- You pay tax on the money withdrawn from a RRIF.
- You cannot contribute money to a RRIF; it’s a money-goes-out account.
- Once the RRIF is established you are forced to make minimum withdrawals, meaning you may need to sell investments inside the account to meet those minimum withdrawals.
Mandatory Withdrawals – RRIF 101
The table below shows the RRIF minimum payout percentages for different ages. As you can see, the annual percentage payouts gradually increase to age 95.
|Age At Start Of Year||RRIF Minimum Payout Percentage|
|95 and older||20.00%|
Notes on withdrawals:
- You can use $2,000 associated with the pension income tax credit after age 65 for a RRIF.
- For an $500,000 RRIF you’ll be forced to withdraw a minimum of $26,400 if you wait until the end of the year you turn age 71 ($500,000 * 0.0528%) and you’ll be taxed on that income.
- You can decide the frequency at which you want money withdrawn from your RRIF. Personally, I might go for annually.
- By design, RRIFs provide income for both the annuitant and his/her spouse. This means the minimum withdrawal percentage can be based upon the younger spouse’s age to reduce the required minimum withdrawal percentage.
- Referenced above, you must pay tax when you take money from your RRIF; money is considered taxable income in the year it is withdrawn and must be added to your income for tax purposes.
- You can withdraw more money beyond the minimum forced amount but you’ll be taxed on that money as well. I probably won’t do that myself.
- Consider income-generating investments inside your RRIF (I will) because if you’re forced to withdraw money from this account, you can withdraw the dividends and/or distributions for the most part and keep your capital intact for any longevity risk.
- Money left in your RRIF when you die can go to a beneficiary – read more here for tax considerations and beneficiaries for your RRSP, RRIF, TFSA and much more.
How to optimize RRSPs/RRIFs
I think RRIFs fill a great space in many retirement plans but I’m far from sure how I will use this account decades down the road.
This is my current thinking:
- Mid-50s, early or semi-retirement if possible, withdraw some money out of RRSP(s).
- Use up tax-inefficient money inside the RRSP before TFSAs:
- Withdrawal from registered accounts like the RRSP strategically/slow withdrawals to smooth out taxes.
- Keep tax-efficient investments intact for as long as I can (investments inside Tax Free Savings Accounts (TFSAs)) “until the end”.
- Move any residual money from RRSPs, not spent during 60s and 70s, into RRIF when forced in the year I turn age 71.
- By spending RRSP/RRIF assets before age 71, I can defer inflation-protection benefits like Canada Pension Plan (CPP) and Old Age Security (OAS.
I’m taking some time this year to learn more about RRIFs to help my parents make some decisions. As I get older and my understanding about taxes and investments matures hopefully this knowledge can apply to us.
Do you have plans to use a RRIF in retirement? Are you using a RRIF now? If so, how?