Six Compelling Benefits of Registered Retirement Income Funds (RRIFs)

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Most working Canadians are aware of the benefits of contributing to their Registered Retirement Savings Plan (RRSP), but many are less aware of the benefits of transferring their RRSP assets to a Registered Retirement Income Fund or RRIF.

It’s good to understand these benefits because, like it or not, your RRSP must be closed by the end of the year in which you turn 71. At that time, or at an earlier time of your choosing, one of three things must happen to your RRSP assets:

  • You may receive a lump sum payment (minus source deductions, and the payment must be included as income when you file your taxes)
  • You can buy an annuity that will provide you with a guaranteed regular income
  • You can transfer the assets to a RRIF, which is similar to an RRSP, except that you cannot add new funds and you must make mandatory minimum withdrawals each year

These three options are not mutually exclusive: you can choose a combination of any of them.

By far the most popular option is the RRIF. This article highlights six key benefits of converting your RRSP to a RRIF.

  1. Savings grow tax-free
    Just like your RRSP, all investments in your RRIF continue to grow tax-deferred. Withdrawals from your RRIF are treated as taxable income in the year they are received.
  2. Regular income stream, no withholding tax on minimum withdrawal required
    Although there is a minimum payment that you must receive annually from your RRIF, there is no maximum amount. Withdrawals may include recurring automatic payments that you set up and/or lump sum payments, and these payments may be changed at any time to meet your income needs. Unlike RRSP withdrawals, no withholding tax is taken from your RRIF minimum withdrawals.
  3. The minimum withdrawal required may be based on your spouse’s age
    Your minimum annual withdrawal amount is set as a percentage of the market value of your holdings, and the percentage increases each year based on your age. However, you can choose to schedule withdrawals based on your spouse’s age. If your spouse is younger than you, this option reduces your required annual withdrawal.
  4. Splitting pension income with your spouse to reduce your tax bill
    Up to 50% of an individual’s eligible pension income can be transferred (“split”) to their spouse or common-law partner, provided the transferring spouse is 65 years of age or older. RRIF income is considered qualified pension income. When a higher-income spouse transfers pension income for tax purposes to their lower-income partner, the couple can realize significant tax savings.
  5. $2,000 pension income credit
    Starting the year you turn 65, you can claim a federal tax credit on your first $2,000 of eligible pension income, which includes your RRIF payments. This could result in hundreds of dollars in tax savings each year. If your income is low enough that you don’t need the full credit to reduce your tax bill to zero, you can transfer the unused credit amount to your spouse or common-law partner.
  6. Your spouse can receive your RRIF tax-free
    If you name your spouse as Beneficiary from your RRIF, the assets can be transferred tax-free to their RRSP or RRIF upon your death. If you name your spouse a successor annuitant, they can take over your RRIF tax-free and start receiving RRIF payments. In either case, your RRIF assets will not form part of your estate and will not be subject to probate fees.

If you have questions about RRIFs or want to create an RRSP asset transition plan, let’s talk! 250-787-0365

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