A Registered Retirement Income Fund (RRIF) is one of the options for converting a Registered Retirement Savings Plan (RRSP) into income, as required, at age 71. Similar to an RRSP, it enables you to continue to hold a variety of investments and shelter their earnings from income tax until withdrawn. The difference is that unlike an RRSP, you're required to withdraw a minimum amount from a RRIF each year.
The other two RRSP maturity options are to purchase an annuity product and receive a guaranteed fixed income stream that's only subject to tax as received or to convert the funds to cash and pay tax on all of their accumulated value in a single year. RRIFs and annuities are therefore the preferred option for those looking to avoid a potentially large one-year tax hit.
To align with today's longer lifespans and address expected lower investment returns, last year's federal budget reduced RRIF minimum withdrawal limits. It lowered the required withdrawal rate at age 71 from 7.38% to 5.28%, with the rate increasing each year to a maximum cap of 20% by age 95 (one year longer than before). This was good news for those looking to shelter retirement savings from income tax as long as possible.
If you have already withdrawn from your RRIF at the 7.38% rate for 2015, you have the option of recontributing the 2.1% excess by the end of February 2016 and claiming it as a 2015 income tax-deduction.
Michelle Connolly, Vice-President, Tax, Retirement and Estate Planning at CI Investments, recommends making the repayment if you don't need the extra RRIF funds to cover your lifestyle spending. In an article on Advisor.ca, she writes, "All other things being equal, those reporting taxable income in 2015 between $45,282 and $90,563 should repay and withdraw those funds again in 2016. Why? Because they will pay 1.5% less tax on RRIF income in 2016 than in 2015." (That's thanks to a cut in the tax rate this year.)
Going forward, before deciding whether to take the new RRIF minimum, an average amount, or perhaps an even greater amount, she recommends discussing the following factors with your advisor:
- The estimated duration of your RRIF
- Your personal tax rate while drawing RRIF income
- The estimated final tax rate of your estate
- The anticipated rates of return for the RRIF and your non-registered accounts
- The after-tax income required to support your retirement lifestyle needs
An advisor can help ensure you create a withdrawal plan to both minimize taxes and provide you with the income you need to fund your retirement goals.