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Frequently Asked Questions
Background on Registered Retirement Income Funds
- What is a RRIF?
- Why are there RRIFs?
- What tax benefits are provided to RRSPs and RRIFs?
- Why must an RRSP be converted to a RRIF?
- Why is the age for conversion of an RRSP to an annuity or a RRIF set at 71?
- What happens when an individual transfers assets from an RRSP to a RRIF?
- Is there an amount that an individual must withdraw from a RRIF each year?
- Why is there a minimum annual withdrawal amount for RRIFs?
- What are the tax consequences of RRIF withdrawals?
- Does an individual have to sell assets to fund RRIF minimum withdrawals?
- Would an individual have to sell RRIF assets to pay the tax resulting from a RRIF minimum withdrawal?
- Why is the RRIF annual withdrawal amount calculated based on the value at the beginning of a year?
- What investments can be held in a RRIF?
- Is the new TFSA useful for individuals receiving amounts from RRIFs?
- How are low-income seniors affected by the rules regarding RRIFs?
A Registered Retirement Income Fund (RRIF) is a retirement income plan that receives beneficial treatment under the income tax system.
A RRIF provides a flexible vehicle that individuals may use to convert RRSP savings, which they have accumulated during their working years, into retirement income.
RRIFs are an integral part of the Registered Retirement Savings Plan (RRSP) retirement savings system. By the end of the year individuals turn 71 years of age, they must make arrangements to start using their RRSP savings to provide for a retirement income: either by buying a life annuity from a financial institution or by transferring the savings to a RRIF.
RRIFs were introduced to allow individuals who save for retirement in an RRSP, but who do not wish to buy a life annuity, the flexibility to manage their own retirement savings.
What tax benefits are provided to RRSPs and RRIFs?
Contributions to an RRSP within specified limits are deducted from income subject to tax, and income earned in the RRSP is not taxed. Contributions to RRSPs, and income earned in RRSPs and RRIFs, are taxed only when withdrawn. This results in a lower income tax burden on these savings than on ordinary savings, thus assisting individuals to save for retirement.
A similar benefit is provided to retirement savings of individuals who participate in an employer sponsored registered pension plan (RPP).
Why must an RRSP be converted to a RRIF?
The conversion ensures that RRSP savings accumulated during an individual’s working years are used to provide income during retirement. This is consistent with the purpose of RRSPs, and the tax assistance provided through them.
Similar rules for pension commencement apply to RPP members.
Why is the age for conversion of an RRSP to an annuity or a RRIF set at 71?
The maximum age for conversion of an RRSP to a life annuity or a RRIF was 69, until it was changed to 71 by Budget 2007. This is an appropriate age to require individuals to convert tax-deferred savings into a retirement income vehicle. As the average age of retirement in Canada is closer to 62, the conversion age gives considerable flexibility as to when to begin receiving savings as retirement income.
What happens when an individual transfers assets from an RRSP to a RRIF?
The total amount in an individual’s RRSP can be transferred to a RRIF without any income tax being paid. This means that the RRSP contributions and the income on them will only be taxable when withdrawn from the RRIF.
It also means that particular assets, like shares, do not have to be sold, but can be transferred as they are ("in-kind") to the RRIF, so long as the Financial Institution involved is set up to accommodate this.
Is there an amount that an individual must withdraw from a RRIF each year?
Each year, beginning with the year in which individuals turn 72, they must withdraw at a minimum a specified percentage of the value of the RRIF, determined at the beginning of the year, as retirement income. This percentage starts at 7.38% the first year a minimum withdrawal is required and rises to 20% for age 94 and over. These are minimum withdrawal amounts so an individual may choose in any year to withdraw a larger amount.
Why is there a minimum annual withdrawal amount for RRIFs?
The minimum withdrawal amount ensures that savings accumulated during an individual’s working years are received as retirement income. The income tax benefits provided to savings in RRIFs and RRSPs assist individuals to save during their working years in order to generate income in retirement.
The increasing percentages are intended to ensure that individuals generally receive most or all of their RRIF savings as retirement income in their lifetime. This is a similar result to an individual who has chosen to convert an RRSP to a life annuity instead of to a RRIF -- the life annuity payments, which are taxable like RRIF withdrawals, will cease at death.
What are the tax consequences of RRIF withdrawals?
Amounts withdrawn from a RRIF must be included in the individual’s income for tax purposes for the year of the withdrawal. Individuals may then have to pay income tax on that income, depending on their overall tax circumstances.
Does an individual have to sell assets to fund RRIF minimum withdrawals?
There is no requirement in the income tax rules for an individual to sell assets to make RRIF minimum withdrawals. If the Financial Institution involved is set up to do so, it can transfer particular assets, such as shares, from the RRIF into another type of investment account in the name of the individual without any sale (i.e. "in-kind").
Would an individual have to sell RRIF assets to pay the tax resulting from a RRIF minimum withdrawal?
Depending on the individual’s circumstances, there may be no income tax payable on their RRIF withdrawals. In many cases where income tax is payable, individuals will have cash or other assets to pay the tax.
Why is the RRIF annual withdrawal amount calculated based on the value at the beginning of a year?
The RRIF minimum amount is based on the value of the RRIF at the beginning of the year so that individuals can plan their withdrawals for the year.
What investments can be held in a RRIF?
RRIFs can hold a broad range of investments including publicly-listed equity and debt securities, mutual fund units, GICs and government bonds.
Is the new TFSA useful for individuals receiving amounts from RRIFs?
Yes. Starting in 2009, the Tax-Free Savings Account (TFSA) will allow individuals to make contributions up to $5,000 each year. The TFSA provides a full tax exemption on investment income, including capital gains, and withdrawals are tax-free. In addition to being exempt from income tax, TFSA withdrawals will not affect income-tested benefits or credits, such as the Age Credit or OAS/GIS benefits.
If individuals do not need the amount of a minimum RRIF withdrawal, they can save the after-tax amount in a TFSA, up to their available TFSA contribution limit.
How are low-income seniors affected by the rules regarding RRIFs?
Low-income seniors generally will not pay income tax on RRIF withdrawals. This is because, in the case of senior couples, tax will not be payable on the first $33,752 in income they receive in 2008; a single senior may receive up to $16,876 before paying tax. Seniors benefit from the Basic Personal Amount, and other credits that recognise their reduced capacity to pay tax, such as the Age Amount and the Pension Income Amount.
