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A Registered Retirement Income Fund (RRIF) is very much like an RRSP only it works in reverse. Like an RRSP, all of the growth and income generated by the assets in a RRIF are tax-sheltered until they are withdrawn from the plan. Unlike an RRSP, where your purpose is to build retirement assets by making contributions, the purpose of a RRIF is to supplement your retirement income by making regular withdrawals. In fact, CRA requires that you take at least a minimum amount out of your RRIF each year.
Your minimum annual payment is based on your age (as of January 1) and is calculated as a percentage of your RRIF’s value at the beginning of each year. If you have a spouse, you may use their age to determine the minimum annual payment. While you may make a withdrawal in the year you open your RRIF, you are not required to do so.
Canadians are living longer. Approximately one out of every three individuals who are 70 years of age will be blowing out candles on their 90th birthday.
In recognition of this fact, in 1992 amendments were made to the formula that determines the minimum amount you must withdraw from your Registered Retirement Income Fund (RRIF) each year.
Two important features of a RRIF:
You may use the younger spouse’s age to calculate your minimum RRIF payments. This will keep your required RRIF minimum withdrawals as low as possible. While you must withdraw a minimum amount (beginning in the calendar year following the year in which RRIF was established), there is no maximum withdrawal limit.
You may take as much out of your RRIF as you want, whenever you want. Of course, the downside to all of this flexibility is that, if you take too much money out, your RRIF may expire before you do.
If you only withdraw the required minimum amount, there will be no withholding tax deducted from your payment. However, the amounts withdrawn from your RRIF must be included as income for tax purposes for the year of the withdrawal which will be subject to income tax depending on your marginal tax rates and any available tax credits or deductions. If you take more than the minimum amount out of your RRIF, you will be subject to withholding tax. When you prepare your annual income tax return, the tax withheld is reported as tax already paid.
RRIF Formula Prior to Age 71
The following RRIF formula is used to determine your minimum RRIF payments if you are 70 years old or younger.
Value of RRIF at Beginning of
Year 90 minus Your Age at =the Beginning of the Year
For example, on January 1st, if you were 65 years old and had $100,000 in your RRIF, the minimum you would have to take out this year is $4,000 or $100,000 divided by 25 (90 – 65).
To make things easier for you, on the chart on the front page, we’ve done the math back to age 65. If you want to begin your RRIF even earlier, you will need to apply the above formula.
At BMO Nesbitt Burns, you may choose to make withdrawals monthly, quarterly, semi-annually or once a year. You can choose to receive a cash payment or withdraw securities from your account.
Points for Consideration
While you may make a withdrawal in the year you open your RRIF, you are not required to do so. Your first required RRIF payment will be calculated on January 1st of the year after you open the plan. You then have until the end of the year to make your minimum annual withdrawal. But if you do make a withdrawal in the first year, it will be subject to withholding tax.
You do not have to sell RRIF assets to make the RRIF minimum withdrawal. If you don’t require the withdrawal as cash for income, you can transfer specific assets (total value at least equal to the minimum withdrawal amount) held in your RRIF to another type of investment account “in kind” without any sale. Note, if an “in kind” withdrawal exceeds the minimum withdrawal amount you will be subject to withholding tax and must have cash available in the RRIF to pay this amount.
If you are 65 or older, RRIF withdrawals qualify for the $2,000 Pension Income Tax Credit. When it comes time to file your personal tax return, remember that your RRIF withdrawals can qualify for the $2,000 Pension Income Tax Credit (if you are age 65 or older). This means you are entitled to deduct from your taxes payable, a tax credit on the first $2,000 of pension income received. You can start taking advantage of this as soon as you turn 65 by transferring $14,000 from a RRSP to a RRIF and taking out $2,000 per year from age 65 to 71 (inclusive). Depending on your marginal tax rate, this pension tax credit will reduce or eliminate the incremental tax otherwise owing on the additional $2,000 of qualifying income annually, to the extent that you are not otherwise taking advantage of this credit with other income.
If you have a Spousal RRSP that you have converted to a RRIF, you do not have to wait three years from the time of the last contribution to make a withdrawal as long as you only withdraw the minimum amount. If you withdraw more than the minimum amount, the excess amount will be subject to the three year attribution rule and may be taxed in your spouse’s hands.