Managing your RRIF withdrawals effectively

Each year, you’re required to make a minimum Registered Retirement Income Fund (RRIF) withdrawal, calculated as a percentage of your RRIF assets. The percentage is based on your age, and it increases each year. Every withdrawal is taxed as regular income, but several strategies can help reduce the impact of the tax liability. 

Use your younger spouse’s age

When you establish your RRIF, you can have your required annual withdrawal based on the age of your spouse. If your spouse is younger, you lock in a lower minimum payment that reduces your annual tax bill.

Split RRIF income

RRIF income qualifies as eligible pension income for pension income splitting. If you’re 65 or older, you can split up to 50% of your RRIF income with your lower-income spouse to reduce your combined tax bill. 

Trigger the pension income tax credit

You can implement this strategy at age 65 when you don’t actually need the RRIF income. To put it into practice, open a RRIF, but only transfer enough Registered Retirement Savings Plan (RRSP) funds to enable you to withdraw $2,000 from your RRIF each year from ages 65 to 71. The $2,000 withdrawal qualifies as pension income, triggering an annual 15% credit on your tax return. 

Customize withdrawal amounts

Determining the amount of annual RRIF withdrawals that best suits your situation depends on your other income sources, age, marital status, tax situation and other factors. So it’s important to work with your advisor to plan withdrawals. One person might withdraw only the minimum required amount to keep their annual tax bill lower. Another retiree may withdraw larger amounts because the tax on the payments is less than the tax their estate would pay on those RRIF assets. 

Plan initial spousal RRIF withdrawals

Planning is essential if you withdraw funds from a spousal RRSP or RRIF when you have contributed to the spousal RRSP in the year of the withdrawal or during the previous two calendar years. Payments up to the minimum RRIF withdrawal amount are taxable to the lower-income spouse, but any payments exceeding this amount would be taxable to the contributor.

Use your Tax-Free Savings Account (TFSA)

If you don’t need the minimum RRIF amount to support your retirement right away, you can contribute the funds to your TFSA, provided you have contribution room. Although you pay tax on the withdrawal, the funds can now grow in a tax-free environment.

Make in-kind withdrawals

You also have another option beyond selling investments and withdrawing cash. You can take your withdrawal in kind, transferring the investments to a non-registered account or TFSA. This allows you to keep investments you believe hold promise.