Although money can’t buy happiness, it sure eliminates a lot challenges which will allow us the freedom to pursue our own happiness. For those who are nearing retirement in Canada, or thinking about retiring in Canada, an important factor which will determine your lifestyle in retirement is going to be your income.
Your retirement income in Canada will come from many different sources: perhaps you have a private pension, a federal pension, non-registered savings, or registered savings. One you’ll eventually have is a retirement income fund, or RIF. But even a RIF comes in many forms, such as LIRA, LIA, or RRIF. Today, we will discuss what is a RRIF investment, and how it affects a Canadian investor.
What is a RRIF and how does it work?
If you have a registered retirement savings plan, or RRSP in Canada, it’s important for you to learn about the RRIF. Why? Because if you still have funds within an RRSP at the age of 71, your RRSP will automatically become a registered retirement savings plan!
The key difference of what happens when your RRSP changes into a RRIF is that you are now obligated to make annual withdraws at a “prescribed rate” set by the federal government. Technically speaking, you could have a RRIF as early as 65, but there is almost no reason to do this as a Canadian retiree.
Starting the year after you open a RRIF, you MUST start making withdraws. For most people since they’re forced to turn their RRSP into a RRIF, they must make withdraws the year they are 72. See the table in the later section for the RRIF prescribed rates by the government.
As you can imagine, you’re very likely to finish withdrawing most of your money within about 20 years or so, unless your portfolio is performing amazingly well.
What is the advantage of a RRIF?
To be perfectly honest, there is no advantage of an RRIF, as it is a severely limited program put in place by the Canadian government to make sure you take your money out, at which point you will need to pay taxes. So for you, there is no advantage, but the government enjoys the advantage of increasing your income tax.
Can you lose money in a RRIF?
Since the RRIF can still be actively invested, but you just can’t add any more funds, you can definitely still lose money within an RRIF. The performance of your RRIF account depends entirely on what vehicles you’ve chosen to invest into. Like the RRSP and TFSA, 2 other kinds of registered accounts, you can invest within a wide variety of options in an RRIF such as stocks, funds, and ETFs, which you can read about here.
RIF vs RRIF
A RIF, or retirement income fund, is a general term for the various types of retirement accounts. The most common 2 types of RIFs are RRIFS, or registered retirement income fund; and a LIF, or life income fund. For all intents and purposes, both the RRIF and LIF are nearly identical. Thus, what we learn about the RRIF today, you could also apply to a LIF!
How much do you have to withdraw from your RRIF each year?
Take a look at the following table to see how much you need to withdraw from a RRIF each year based on your age:
10 Things to know about RRIFs
- You can no longer contribute to a RRIF. Once you have a RRIF set up, you are no longer allowed to contribute any money into it, even if you have room within your RRSP!
- You can still manage the funds within the RRIF, and make adjustments to your investments. You just can’t add any new money into it.
- You are forced to convert your RRSP into a RRIF at the age of 71, then you MUST start withdrawing at the age of 72.
- Any withdraws you make are fully taxable at your marginal tax rate, which for some people can be very high.
- If you die with a spouse, the RRIF can be transferred to them tax free, and if they’re younger, it can actually be converted back into RRSP.
- If you die with no spouse, then the RRIF can go to your beneficiaries, or estate. However, it will be “deemed disposed of” which means your beneficiary or your estate will that amount of extra income in that year.
- You can have as many RRIF accounts as you want. Just like you can have as many RRSP accounts as you want. Just make sure you keep track of them!
- If you’re withdrawing a significant amount, there will be a withholding tax. The more you withdraw, the higher the withholding tax.
- Pension income allows you to split income with your spouse, meaning you could lower your family’s taxes.
- Because RRIF is taxable income, it could reduce your retirement benefits from the government, so do some careful planning!