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How Does a RRIF Work?

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This article is timely, with the end of the year in sight.

A Registered Retirement Income Fund (RRIF) is a retirement income vehicle in Canada, designed to provide a steady income stream to retirees by converting savings from a Registered Retirement Savings Plan (RRSP) into taxable income. Here's how it works:

  • Setting Up a RRIF

You can open a RRIF by transferring funds from your RRSP or certain other eligible plans (e.g., a Registered Pension Plan).

A RRIF must be set up by the end of the year in which you turn 71 (or earlier, if you choose). You cannot contribute directly to a RRIF; funds are transferred in from an RRSP or similar plan.

  • Withdrawals

Once the RRIF is set up, you're required to withdraw a minimum amount every year. The minimum is based on a percentage of the RRIF's value as of January 1 each year and increases with age. For example:

  • At age 71, the minimum withdrawal is 5.28%.
  • At age 80, it's 6.58%.
  • By age 95, it's 20% annually.

There’s no maximum withdrawal limit, so you can withdraw more than the minimum if needed, though all withdrawals are taxable.

  • Taxes on Withdrawals

Withdrawals from a RRIF are considered taxable income and must be included in your annual tax return.

If you withdraw more than the minimum amount, withholding tax applies to the excess:

  • 10% for amounts up to $5,000.
  • 20% for amounts $5,001 to $15,000.
  • 30% for amounts over $15,000 (outside of Quebec, which has different rates).
  • Investments Within a RRIF

A RRIF can hold the same types of investments as an RRSP, such as stocks, bonds, mutual funds, GICs, and ETFs. Investments continue to grow tax-deferred within the RRIF until withdrawal.

  • Flexibility

You have control over the timing and amount of withdrawals (beyond the minimum) and can adjust your investment strategy based on your needs.

Spousal RRIFs: If you transfer funds from a spousal RRSP, the RRIF remains under your name, but tax rules may apply to your spouse if recent contributions were made.

  • End of a RRIF

The RRIF remains active until the balance is fully withdrawn or the account holder passes away. Upon death, remaining funds are typically transferred to a named beneficiary or the estate, with tax implications depending on the circumstances.

  • Key Benefits of a RRIF:

  • Continues to provide tax-sheltered growth.
  • Offers flexibility in withdrawals beyond the mandatory minimum.
  • Helps convert retirement savings into a predictable income stream.

To ensure your RRIF is maximizing your income and minimizing your tax, contact our office so we can review and advise you of the most efficient strategies.

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Section 85 of the Income Tax Act - Continued
 

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Monday, 23 December 2024

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Ramesh Gupta CPA
Professional Corporation
9889 Markham Road, Unit #203
Markham, ON  L6E 0B7