24.4.3 Registered Retirement Income Funds

Overview

A Registered Retirement Income Fund (RRIF) is a retirement vehicle provided to Registered Retirement Savings Plan (RRSP) holders in Canada. It allows them to continue deferring tax on the assets in their plans. When RRSP assets, including the capital and accumulated earnings, are transferred to an RRIF, specific guidelines come into play.

Key Features of RRIFs

1. Tax Deferral: Similar to RRSPs, RRIFs allow for the deferral of taxes on investment income and appreciation.
2. Mandatory Withdrawals: From the second year onwards, RRIF holders must withdraw a minimum amount annually, which is subject to income tax.
3. Flexibility in Withdrawal: While there is a minimum withdrawal amount, there is no maximum limit, providing flexibility to access funds as needed.
4. Spousal Age Consideration: The term of the RRIF may depend on the age of the holder’s spouse if the spouse is younger, potentially extending the distribution period.

Calculation of Minimum Withdrawal Amount

For RRIF holders below the age of 71, the minimum annual withdrawal is determined using the formula:

$$ \text{Withdrawal Percentage} = \frac{1}{90 - \text{Age}} $$

At age 71 and older, the percentage amount is prescribed by the Canada Revenue Agency (CRA). For instance, the minimum withdrawal rate at age 71 is 5.28% and increases incrementally until it reaches 20% at age 95.

Example Calculation

Consider Walter, who transferred his RRSP to an RRIF last year. This year, Walter is 65 years old, and his RRIF is valued at $200,000.

Using the formula, Walter’s minimum required withdrawal amount is calculated as follows:

$$ \text{Withdrawal Percentage} = \frac{1}{90 - 65} = \frac{1}{25} = 0.04 = 4% $$

Thus, Walter must withdraw at least $8,000 this year.

Investment and Management Options

RRIF holders can manage their investments similarly to RRSPs. They may opt for a self-directed RRIF, allowing them to select and manage their investments, or they may have the plan professionally managed by a financial institution. Eligible investment options include:

• Stocks: Equity securities traded on recognized exchanges.
• Bonds: Debt security investments issued by corporations or governments.
• Investment Certificates: Such as Guaranteed Investment Certificates (GICs).
• Mutual Funds: Pooled funds investing in diverse assets.
• Mortgages: Investments backed by real estate.

Frequently Asked Questions (FAQ)

What is the difference between an RRSP and an RRIF?

An RRSP is a savings vehicle for retirement that allows for tax-deferred growth. An RRIF, on the other hand, is used to withdraw income during retirement while continuing to defer tax on the invested assets. RRIFs have mandatory annual minimum withdrawals unlike RRSPs.

Is there flexibility in how much I can withdraw from my RRIF each year?

Yes, while a minimum annual amount must be withdrawn according to CRA guidelines, there is no maximum limit on how much you can withdraw each year.

Can multiple RRIFs be held simultaneously?

Yes, similar to RRSPs, individuals can hold more than one RRIF.

Are all investment vehicles eligible for inclusion in a RRIF?

RRIFs can include a variety of investments such as stocks, bonds, mutual funds, GICs, and mortgages, provided they meet the Canadian content requirements.

Glossary and Definitions

• RRSP (Registered Retirement Savings Plan): A tax-deferred retirement savings plan used by Canadians to accumulate funds for retirement.
• CRA (Canada Revenue Agency): The federal agency responsible for administering tax laws for the Canadian government.
• Tax Deferral: The process of delaying the payment of taxes on investment income.
• Guaranteed Investment Certificates (GICs): A type of financial product that offers a guaranteed rate of return over a fixed period.
• Self-Directed RRIF: A RRIF that allows the holder to make their own investment decisions.

Key Takeaways

• An RRIF is an effective tool for retirement income, continuing the tax-deferred benefits of an RRSP.
• Mandatory annual withdrawals from an RRIF are based on age or the age of the younger spouse, starting the year after the RRIF is established.
• Holders have significant flexibility in both the amount they can withdraw annually (beyond the minimum) and in their investment choices.

    graph TD;
	  A[RRSP] -->|Transfer| B[RRIF];
	  B -->|Annual Minimum Withdrawal| C[Taxable Income];
	  B -->|Investment Options| D[Stocks];
	  B --> E[Bonds];
	  B --> F[Mutual Funds];
	  B --> G[Investment Certificates];
	  B --> H[Mortgages];

In consultation with financial advisors, account holders can customize their RRIFs in line with their unique retirement goals and risk tolerance.