Why use them … and what you need to know
You’ve spent much, or all, of your career putting some of your salary into a Registered Retirement Savings Plan (“RRSP”) to reduce and defer your tax burden, and to ensure you have some savings set aside for retirement. That’s a smart thing to do because it has helped you build up a nest egg for the time when you may no longer have a regular salary coming in to fund your day-to-day lifestyle.
If you’re getting close to retirement, your smartest move may be not to immediately deregister all of the savings you’ve built up over your career. Why? Because any money you withdraw from your RRSP will be immediately considered income in the year you deregister that money, and you will be taxed accordingly.
Thankfully, you have some options to avoid this potentially massive tax burden, including transferring your RRSP assets into a Registered Retirement Income Fund (“RRIF”). A RRIF is basically an RRSP in reverse. Rather than building your savings tax-efficiently in an RRSP, a RRIF allows you to gradually withdraw your money in a tax-efficient manner when you need the income. Beyond the potential tax savings of taking out your money incrementally, the major benefit of a RRIF is that your money continues to grow tax free while you draw money from it.
Some important things to know about RRIFs
As registered savings accounts, and similar to RRSPs, there are a number of rules and restrictions governing RRIFs. According to the Canada Revenue Agency (“CRA”), rules and restrictions include the following:
- Your money can be transferred into a RRIF from an RRSP at any time, but no later than December 31 of the year in which you turn 71
- Once your money is transferred to a RRIF, you can no longer make contributions. Only withdrawals are allowed
- The CRA requires you to take a minimum amount out of your RRIF every year. The minimum amount is calculated based on your age and the market value of your assets at the end of the previous year
- Your RRIF withdrawals are considered taxable income and will be added to your income for tax purposes. You are not required to make withdrawals in the first year in which you open your RRIF
- You may withdraw more than the minimum allowable amount from your RRIF at any time. That said, a higher amount taken from your RRIF could put you in a higher tax bracket in that year
- Similar to RRSPs, you have many investment options for your RRIF, including mutual funds and guaranteed investment certificates
A final note about RRIFs
If you die with money left in your RRIF, that money will be considered taxable income as of the date of your death. That said, your RRIF assets may be transferred tax free to your spouse’s RRIF when you die. If you have children or grandchildren under 18 years of age and financially dependent on you at the time of your death, the money in your RRIF may be transferred to their RRSPs or RRIFs tax free.
Please contact our office today to learn more about the tax-deferral and savings strategies available to you in the lead-up to your retirement.