Retirement
By Jason Heath, CFP on March 6, 2024
Estimated reading time: 7 minutes
By Jason Heath, CFP on March 6, 2024
Estimated reading time: 7 minutes
Most registered retirement savings plans are eventually converted to registered retirement income funds. Here’s what to know about RRIF withdrawals.
At some point, a registered retirement savings plan (RRSP) is typically converted to a registered retirement income fund (RRIF). The latest you can defer the conversion of your account is the end of the year you turn 71. This means that by December 31 of your 71st year, you need to either withdraw the balance of your RRSP and pay tax on it, use the account to purchase an annuity from an insurance company, or convert it to a RRIF. Most Canadians choose to convert their RRSP to a RRIF.
You do not have to wait until age 71 to convert your RRSP. Most people consider doing so once they have retired.
The minimum age at which you can convert an RRSP to a RRIF varies by province: it’s 50 in some, and 55 in others. But starting the year after conversion, you must begin to make minimum withdrawals from your RRIF. The table below includes the minimum withdrawal rates for all RRIFs set up after 1992. It shows the percentage of the account balance (at the previous year-end) that must be paid out in the current year.
The withdrawal rates above represent the minimum percentages that must be withdrawn, but account holders can make larger withdrawals if they need to or want to, as long as the account is not locked in.
Why do some Canadians have locked-in accounts? When a pension plan member leaves a pension, they may have the opportunity to transfer funds from their pension to a locked-in retirement account (LIRA). If they have a defined contribution (DC) pension, they may transfer the investments to a locked-in account. If they have a defined benefit (DB) pension plan and elect to receive a lump sum commuted value and to forgo their future monthly pension payments, they may be eligible to transfer some or all of the funds to a locked-in account.
A locked-in RRSP may also be called a LIRA. LIRA is the term used in B.C., Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia, New Brunswick, and Newfoundland and Labrador.
You can withdraw from an RRSP, but you cannot withdraw from a locked-in RRSP. The latter must be converted to the locked-in equivalent of a RRIF: a life income fund (LIF) is most common, although Newfoundland and Labrador has locked-in RIFs (LRIFs) and Saskatchewan and Manitoba have prescribed RRIFs.
Earn up to 4% interest on your savings. Plus, use the pre-paid card for everyday purchases and free ATM withdrawls.
$0 commission on all transactions. No minimum deposit needed.
Save more every day with 4.00% interest on every dollar and flexible tools to grow your money.
MoneySense is an award-winning magazine, helping Canadians navigate money matters since 1999. Our editorial team of trained journalists works closely with leading personal finance experts in Canada. To help you find the best financial products, we compare the offerings from over 12 major institutions, including banks, credit unions and card issuers. Learn more about our advertising and trusted partners.
LIFs have the same minimum withdrawal rates as RRIFs. But they also have maximum withdrawal rates, which vary by province and territory, to prevent former pension plan members from spending their pension funds too quickly. The table below shows the maximum withdrawal rates for LIFs.
There may be situations where locked-in account holders can make withdrawals that exceed the annual maximum. In Ontario, for example, there may be unlocking options for people experiencing financial hardship from:
There are non-hardship unlocking opportunities as well. Sticking with the example of Ontario, you may be able to unlock if:
When a married or common-law RRSP account holder establishes a RRIF, they can elect to use their spouse’s age for their RRIF minimum withdrawals. If an account holder has a younger spouse, this would result in a lower minimum withdrawal requirement.
Couples sometimes use spousal RRSP accounts to split income with each other. The account holder spouse owns the account and will withdraw from it in the future, and the other spouse contributes and claims the tax deduction. A spousal RRSP must be converted to a spousal RRIF before the end of the account holder’s 71st year. The same RRIF withdrawal rules apply, regardless of whether a RRIF is a personal RRIF or a spousal RRIF.
RRIF withdrawals are considered fully taxable income. The withdrawals are reported on a T4RIF slip.
There is no withholding tax required on RRIF minimum withdrawals. This does not mean the withdrawals are not taxable. The withdrawals are added to your income for the year, which may result in a tax balance owing. If you have too little tax withheld in consecutive years, you may need to start paying quarterly income tax installments to the Canada Revenue Agency or Revenu Québec.
If you make extra withdrawals beyond your minimum, withholding tax applies to only the excess, at the following rates:
For Quebec residents making extra RRIF withdrawals, 14% provincial withholding tax applies in addition to the federal tax rates of 5%, 10% or 15%, depending on the amount of the withdrawal.
If a taxpayer is 65 or older, they can move up to 50% of their RRIF withdrawals to their spouse or common-law partner’s tax return. If the recipient spouse’s income is lower, this could result in a couple paying less combined tax.
RRIF withdrawals are also considered eligible pension income and qualify from age 65 onwards for the pension income amount, a small tax credit for seniors.
Withdrawals can be taken in cash or in kind. So, if the financial institution allows it, you may be able to withdraw investments without selling them and have it qualify as a RRIF withdrawal. Not selling the investment could come in handy if there are costs to selling it, or if the asset is illiquid and cannot be easily sold.
RRIF withdrawals can be taken monthly, quarterly or even annually. A retiree can set the withdrawal schedule to their preferences and then manage their account to ensure they withdraw sufficient cash.
You should consider converting your RRSP to a RRIF if you’re certain that you will be making RRIF withdrawals every year when you retire. But think twice about converting your entire account if you have a variable income due to part-time work or consulting, have non-registered investment income that could include sporadic capital gains, or face other circumstances that could cause your income to spike from year to year. If you want to benefit from pension income splitting and to claim the pension income amount, you can convert part of your RRSP to a RRIF. It is not all or nothing.
Upon death, your RRIF is fully taxable unless you leave it to your spouse or to a financially dependent child or grandchild. If your spouse inherits your RRIF, it can remain tax-sheltered until their death.
If a RRIF has a named beneficiary, it will be paid to them without any withholding tax. Your estate pays the tax owing on your final tax return, if applicable. This is an important consideration if your RRIF beneficiaries differ from your estate beneficiaries.
A RRIF with a named beneficiary does not pass through your estate and is generally not subject to probate or estate administration tax.
Millions of Canadians have RRSPs, and those accounts are generally converted to RRIFs. It is important to understand the RRIF rules, including the minimum withdrawals and other considerations, especially as you approach retirement.
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Your email address will not be published. Required fields are marked *
Δ
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Mort Laitner
Rami G Khouri
Donald Low
Ali Fathollah-Nejad
Nikkei Editorial
Michael Kwet
visit website
