RRIF: A Tax Smart Plan For Canadian Retirees

Shweta Mazoomdar
5 Min Read

The recent RRIF reforms will now be able to help retired people in every form. This is because it will be curated in such a way that now it will be of immense help. This does not mean that the RRIF reforms were not considered to be good before. By all means, it has been very helpful. However, now with time, the RRIF is on a path to get more better and with time, it will become more improved too.

What is The RRIF?

A registered retirement income fund or RRIF is defined to be a tax-deferred retirement plan under Canadian tax law. Individuals are known to use an RRIF to generate income from the savings. All of these are accumulated under their registered retirement savings plan. As with an RRSP, an RRIF account is registered with the Canada Revenue Agency.

How The RRIF Works

For this you need to transfer money from an RRSP, PRPP, RPP, SPP, or FHSA to a RRF carrier. This is known to be an insurance company, bank, or trust company. The carrier then makes payments to you. 

Taxation

The earnings in a RRF are tax-free, but certain amounts paid out are taxable. 

Minimum withdrawals

The annual minimum withdrawal amount is calculated by multiplying the market value of your RRF on December 31. This record is of the previous year by a government-set percentage. The given percentage increases with your age. 

When you can use it?

You can use a RRF once you reach the age of 71. 

What you can hold?

RRIFs can hold a variety of investments, including stocks, bonds, mutual funds, guaranteed investment certificates (GICs), and savings deposits. 

Passing away

When you pass away, your attained assets can be transferred to your spouse on a tax-free basis.

How Do You Transfer Funds To A Registered Retirement Income Fund?

You can fund your RRIF in several ways. Here are some of the most common:  

a. By transferring money from your RRSP or from another RRIF you own, 

b. By transferring money from your spouse’s RRSP or RRIF at your spouse’s death, or if you and your spouse separate or get divorced, 

c. From your employer’s deferred profit-sharing plan (DPSP), or 

d. From your spouse’s employer’s DPSP if your spouse has died, or if you and your spouse have separated or divorced. 

How are RRIF withdrawals taxed? 

Keeping up with all the tax laws can be a challenge, and people may not always understand them. “In the absence of a rollover to a spouse on death, the remaining market value of your RRIF is taxable on your final return,” says Potvin. “Many people are surprised to hear this.” 

This means your estate will be on the hook for a tax bill if you die. Along with this, your RRIF account will still have money in it. This is very much true. Plus, it is done unless your beneficiary meets certain criteria. For example, you could name your dependent child or grandchild under 18 as the beneficiary. They could also pay tax on the money that they receive at their presumably low tax rate.

Along with it, they could also use the funds to purchase an eligible annuity. This would be good with regard to paying an income. This is to be done until the year they turned age 18. With the annuity, they would only pay tax on the annual annuity payments they received. The rest of the tax would on the other hand, remain tax deferred. However, if you are running out on some information and would like to gather more on it for transferring funds to your family, then speak to an advisor. 

What Are The Similarities Between a RRIF and A RRSP?

The similarities are as follows:

a. Defer paying tax on your investments while they grow.  

b. Hold a variety of investments. You can choose to invest in:

i. Mutual funds 

ii. Guaranteed investment certificates (GICs)  

iii. Insurance GICs 

iv. Segregated fund contracts, or 

v. Other options that align with your risk tolerance and financial plan 

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