#CanadianInvestor #RRIFRetirement Income Fund #RegisteredInvestmentAccount
TFSA & RRSP Video Link:
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In the last video, we talked about TFSA and RRSP. We mentioned, you cannot hold RRSP forever, instead, you’d have to convert it to RIF when you turn 71 years old. So, today we are going to talk about what is RIF, and what the benefits and rules around it. RIF, just like RRSP, it’s also a registered investment account.
RIF stands for Registered Retirement Income Fund (RRIF), and just as the name suggests, this will be one of your income sources after you retire. It is an extension of an RRSP. The year that you turn 71, you must convert your RSP to an RRIF. This conversion does not trigger any tax payable as you just are transferring your investment from one tax-sheltered account to another, rather than withdrawing them. After the conversation, the Canada Revenue Agency (CRA) specifies that you must take a minimum amount out of your RRIF each year, and pay applicable income tax on the withdrawal.
How RRSP and RIF differs?
One major difference between them is that you can add investment to an RRSP up to age 71. You cannot add to an RRIF once it is established.
If you look at the difference in terms of their functions, an RSP is a tax-sheltered account used to invest for your retirement while an RRIF is a tax-sheltered account that you withdraw income for retirement.
Since you withdraw money from your RIF for retirement, let’s have a look at the withdraw rules around it.
As we mentioned earlier, RIF holders have to withdraw a minimum annual amount from their RIFs, and the withdrawals are taxable income. You can choose to receive this amount as an annual lump sum or monthly, you just need to tell your bank or broker how you want it.
The minimum withdraw amount is based on your age or your spouse's age, and the value of the entire RIF account at the previous year's end. We will have a look at the age and percentage withdraw table on the next slide, and I promise this will make more sense once you see the table.
If you choose to convert your RRSP to RIF at age 64, you would have to take out a minimum of 4% of your entire RIF account value when you turn 65, 4.17% for 66, 5% for 70, on and on. As you can see, the minimum withdrawal percentage increases as you age and will reach the highest 20% once you reach 95 years old.
Since the withdraw amount can use either your own age, or your spouse’s age, that gives you some flexibility.
If you already have other sources of income, and do not need much from your RIF account, you could use your spouse’s age to calculate the minimum withdraw if your spouse is younger. Using their age will result in a lower minimum withdrawal (percentage wise), allowing more of your investment to grow in a tax-deferred environment.
Now that we know withdraws from RIF is taxable, let’s have a look at how the tax works.
When you just take the minimum required withdraw from RIF, you do not need to pay withholding tax upfront. Your withdraw amount is the actual amount you receive. You just need to include this amount as your income when you file your tax and pay for the tax amount owing if there is any on your notice of assessment.
If you withdraw more than the minimum required amount, any funds withdrawn in excess of your minimum are subject to a withholding tax, and the withholding tax rate differs when you withdraw different amounts. We have talked about what is withholding tax in the RRSP video. Withholding tax is the CRA retained tax on your withdraw, but that is not the final tax amount you would have to pay. It’s similar to your paycheck. When you received your payroll deposit from employer, you would see the tax has been deducted already even before it hits your account. And then, when you file your tax for the year, that’s when the CRA finalize your tax lability and you may have a tax refund or amount owing depends on your overall income and deductible expenses.
That is a simple introduction for a RIF account. Now, I don’t want you to have the wrong impression that you can only have either a RRSP or a RIF at one point in time, you could have them both at the same time. Just convert partial of your RSP to RIF before 71 years old, you would end up having both of them at the same time. And, there is some tax benefit to convert partial of your RRSP holdings to RIF and receive payments from it. Also, as we mentioned before, you can set up beneficiaries for registered accounts. For RIF account specifically, you have the option to set up beneficiaries, or set up your spouse as the successor. In the event of your passing, if you have your spouse as the successor, the RIF account will be moved to your spouse’s name and he or she will continue to receive annual payments from it without having to pay a huge upfront income tax as you would if it went to your estate of other beneficiaries. We will talk about this more in-depth in future videos.
