Valuable RRIF withdrawal strategies

Once you open a Registered Retirement Income Fund (RRIF), you're required to make a minimum taxable withdrawal each year, starting the year after it's opened. The amount is based on a percentage of your RRIF's value and your or your spouse's age.

Every withdrawal is taxed as income at your marginal tax rate, but you may be able to minimize the effect of the tax liability through one or more of the following strategies.

Using your spouse's age. If your spouse is younger, you can elect to use their age in the calculation of the minimum required withdrawal. This locks in a lower minimum amount and less tax payable in any year that you want only the minimum withdrawal. Note that you must make this choice when you establish the RRIF.

Splitting RRIF income. Pension income splitting allows you to save tax as a couple by allocating up to 50% of eligible pension income from the higher-income spouse to the spouse in a lower tax bracket. Once you turn 65, you can use RRIF withdrawals to split income, regardless of your spouse's age.

Making a partial RRSP to RRIF conversion. If a couple would normally plan to split pension income when one spouse converts their Registered Retirement Savings Plan (RRSP) to a RRIF at the maximum age of 71, they may decide to implement a partial-conversion strategy. Instead of waiting until 71, you open a RRIF at 65, transfer $14,000 from your RRSP to the RRIF, and withdraw $2,000 each year from age 65 to 71. This allows you to take advantage of the federal pension income tax credit on the first $2,000 of eligible pension income. 

Funding your TFSA. This strategy saves you taxes down the road, rather than reducing your tax burden immediately. Any year you don't need the full amount of your minimum RRIF withdrawal to support your retirement, you can contribute the unrequired funds to your Tax-Free Savings Account (TFSA), up to your contribution limit. This way, future growth and withdrawals of these funds are tax-free.

Customizing your withdrawals. In any year when you don't require income from your RRIF to cover your cost of living, you may choose to receive your minimum payment at the end of the year, potentially maximizing the account's tax-deferral benefits. But you can base your withdrawal schedule on your income needs; for example, choosing monthly, quarterly or semi-annual payments.

Withdrawing more than the minimum. A retiree may want to withdraw more than the minimum amount, even if they don't require the extra funds that year. In some cases, this strategy might result in paying less tax on the withdrawn funds in the current year than the amount payable in future years. Typically, the extra funds are in an amount that reaches the threshold of the retiree's current tax bracket.

We'll work with you to assess and, if appropriate, implement these strategies, as each one's value depends on an individual's or a couple's personal and financial situation.

Choosing your RRIF beneficiary

For couples, naming a spouse is the typical choice. You have several options if you're divorced, widowed, single or have specific estate planning needs.

Designating your spouse. You can name your spouse as the successor annuitant or beneficiary. As successor annuitant, your spouse can simply take over the RRIF. If you name your spouse as beneficiary, your RRIF collapses, the funds are transferred to your spouse's RRIF or Registered Retirement Savings Plan (RRSP) and your spouse reports the transaction on their tax return.

Naming another individual. When you name a child, grandchild or another individual as the beneficiary, they receive the RRIF assets tax-free, and the assets are taxable on your final tax return. An exception is when the beneficiary is a financially dependent child or grandchild, in which case the inheritance is commonly received on a tax-deferred basis.

Choosing the estate. An individual may choose to leave RRIF assets to their estate to help cover taxes payable by the estate or to help fund a trust.

Making a charitable gift. When you name a charity as a beneficiary of your RRIF, your estate receives a donation tax credit equal to the amount of the gift, which helps to offset taxes payable by the estate.

 

¹ In Quebec, the beneficiary can only be named on the RRIF form when the RRIF is an insurance product. Otherwise, the beneficiary must be named in the will.

² In Quebec, you can only name a successor annuitant if the RRIF is an insurance product