Converting your RRSPs to Income

RRIFs: Frequently Asked Questions

1. "What is a RRIF and how exactly does it work?"
2. "Must I be a certain age to purchase a RRIF?"
3. "Where can I purchase one?"
4. "How much can I withdraw from my RRIF each year? Are there restrictions?"
5. "How is the minimum annual payment calculated? How much will my minimum be?"
6. "When must I take my first RRIF income payment?"
7. "What about taxation?"
8. "What investments can I hold in my RRIF? Is a self-directed RRIF for me?"
9. "What are the special taxation issues associated with a spousal RRIF?"
10. "Is there any way to preserve the tax-favoured status of my RRIF for my beneficiaries?"

1. "What is a RRIF and how exactly does it work?"

A RRIF is one of the options you can choose from when you convert your RRSP to start drawing retirement income.

A RRIF provides you with a regular stream of income, subject to a minimum annual withdrawal amount.

The money you transfer to your RRIF continues to grow tax-sheltered until withdrawn as income.

RRIFs are the most flexible of the retirement income options, since you maintain complete control over your savings.

Here's how a RRIF works:

1. First, calculate the minimum RRIF payment you must take each year. Then determine if it meets your annual income requirements.
2. If it does, choose the minimum payment amount. If it doesn't, identify sources of pension and other income you might have access to, or consider withdrawing a larger amount from your RRIF.
3. Determine the payment frequency that best meets your needs - whether monthly, quarterly or annually - and choose the investments you'll want to have your income payments taken from.
4. Pay tax only on the actual amount of RRIF income received each year (in combination with your other taxable income).
5. The balance of your RRIF should remain invested, allowing it to continue growing tax-free until you withdraw it as income.

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2. "Must I be a certain age to purchase a RRIF?"

You can use your RRSP funds to purchase a RRIF any time you want, but remember that you must transfer all your RRSP savings into a retirement income option by December 31 of the year in which you turn 69.

And, you may purchase a RRIF at any time - regardless of your age - with funds transferred from another RRIF, or with funds taken from an annuity originally purchased with RRSP assets.

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3. "Where can I purchase a RRIF?"

RRIFs may be purchased from banks, trust companies, credit unions, insurance companies, mutual fund companies or brokerage firms.

You may buy as many as you wish and, subject to the terms and conditions of your RRIF, can transfer them between financial institutions without tax consequence. However, because you must take the minimum annual payment each year from each RRIF you hold, you may be withdrawing more income than you require, with the result that your savings may not last as long as you need them. Keeping your RRIFs with a single financial institution will make managing your investments and total retirement income easier.

But, before you transfer any RRIFs from one institution to another, consider that your institution will have to pay out the remaining minimum amount for the year before transferring the balance of your RRIF, so you may want to plan such transfers close to year-end.

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4. "How much can I withdraw from my RRIF each year? Are there restrictions?"

You must withdraw at least the minimum amount each year as prescribed by law - except in the year your plan is set up.

While there are no restrictions on the maximum amount you may withdraw annually, selecting the minimum annual payment amount ensures that your funds last throughout your lifetime.

You can make additional RRIF withdrawals over and above your selected payments at any time, realizing that, in doing so, your funds may not last as long as you need them.

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5. "How is the minimum annual payment calculated? How much will my minimum be?"

Your minimum annual RRIF payment is calculated as a percentage of the total value of your plan on January 1 each year.

The factors - which are set by the Income Tax Act (Canada) - are based on your age (or on the age of your spouse if so designated when you set up your RRIF).

Use the Minimum Annual Income Calculator to estimate the minimum annual RRIF payment you can expect to generate from your retirement savings at various points throughout retirement.

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6. "When must I take my first annual RRIF income payment?"

By law, you must begin withdrawing RRIF payments no later than the end of the year following the one in which your plan was opened.

If, for example, you purchase your RRIF in 2000, you are obliged to take your first payment by December 31, 2001.

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7. "What about taxation?"

RRIF payments are taxable in the year they are received. Your total annual RRIF income is added to your other taxable income and you are taxed accordingly.

Withholding tax is not deducted from minimum RRIF payments - it is your responsibility to ensure you have budgeted for it come tax-time!

Withholding tax is deducted from any amount in excess of your minimum payment amount, so be sure to factor that into your calculations when determining how much to withdraw.

If you prefer, you may ask your plan provider to have income tax withheld from your regular income payments.

RRIF withdrawals that exceed your yearly minimum are subject to the following withholding tax rates:

The actual amount of income tax paid at year-end will be based on your income from all sources.

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8. "What investments can I hold in my RRIF? Is a self-directed RRIF for me?"

From an investment perspective, a RRIF is very similar to an RRSP. You can invest your RRIF savings in a variety of investment vehicles including deposits accounts, GICs, and RRIF-eligible mutual funds offered through your financial institution.

Like your RRSP investments, the ones you choose for your RRIF will reflect your personal goals and objectives, your risk tolerance and your time horizon for needing your investments - factors that may change as you move towards and through retirement. In addition, though, your RRIF portfolio should be structured to generate sufficient 'liquidity' to pay you the minimum yearly payment when you require it.

For this reason, it's wise to review your investment strategy with your RRIF provider when setting up your RRIF.

Self-directed Plans

Plan holders who wish to choose from the full range of RRIF-eligible investments - including stocks, bonds, etc. - must open a self-directed RRIF with a discount or full-service broker.

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9. "What are the special taxation issues associated with a spousal RRIF?"

A spousal RRIF is a RRIF that has been created with spousal RRSP, that is from an RRSP that has been created by an individual in his or her spouse's name. Withdrawal of an amount in excess of the yearly minimum from a spousal RRIF may be taxable for the contributor if a contribution was made to the spousal RRSP during the year in which the excess amount was withdrawn, or in the two years prior to the withdrawal.

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10. "Is there any way to preserve the tax-favoured status of my RRIF for my beneficiaries?"

Absolutely! As one of the key advantages associated with a RRIF, consider the tax consequences of naming:

• your spouse as beneficiary
• dependent children/grandchildren as beneficiaries
• other parties as beneficiaries

Your Spouse as Beneficiary

If you name your spouse as successor annuitant, your RRIF will continue to make minimum amount payments to your spouse who will automatically 'step into your shoes' as the new annuitant.

If you name your spouse as beneficiary, he or she can:

• transfer funds to another RRIF, or purchase an annuity in his or her name with new terms and payments
• roll the remaining RRIF assets into an RRSP in his or her name (if younger than 69)
• collapse the plan and take the proceeds into income, paying the required tax

The RRIF funds will retain their tax-sheltered status in all but the last case.

Dependent Children/Grandchildren as Beneficiaries

Special tax-favourable rules also apply if you name as beneficiary a child or grandchild who is "financially dependant" at the time of your death. To be deemed "financially dependant", a child or grandchild must have an income of less than the federal income tax' basic personal amount for that year - $7,231 for the 2000 tax year - in the year prior to your death. If that first criterion is met, other criteria may apply. In the eventuality that the child/grandchild meets the requirements to be declared "financial dependant", then RRIF assets can be transferred, on a tax-deferred basis, to the dependant's RRSP is that dependant is under 18 years of age or to an annuity up to age 18. If the dependant is physically or mentally handicapped, the RRIF can be transferred to an RRSP, a RRIF or an annuity on a tax-deferred basis regardless of the age of the dependant.

Your trust advisor or accountant can provide details.

Other Parties as Beneficiaries

If beneficiaries other than a spouse or dependent children are designated, the full value of the plan must be included as income in the fund holder's final tax return, and taxed accordingly.