RRIF Minimum Annual Withdrawals: What it Means for Seniors
When planning your finances for life as a retiree, having a healthy amount in your Registered Retirement Savings Plan is a good place to start. However, you should be mindful that an RRSP is intended for saving, not for spending. This is where a Registered Retirement Investment Fund comes in handy, otherwise known as an RRIF, which requires that you withdraw a set minimum amount each year. In this post, we’ll explore what this minimum means for seniors once they retire and why you should convert your RRSP into an RRIF when you’re ready to withdraw funds.
Understanding How RRIF Works
An RRIF is similar to an RRSP because it is a tax-sheltered savings account. It grows as you invest in it. However, when it’s time to use the hard-earned money you saved, you should convert your RRSP into an RRIF. You don’t have to worry about being taxed for the conversion, but why else is this an ideal approach?
- First, you’re only taxed on what you withdraw each year above the minimum amount.
- Second, it’s a lot more flexible, letting you decide how much you want to take out as well as the frequency. While there is a required minimum, there’s no maximum limit, though you should be aware of how much you will be taxed on your withdrawal.
- Third, you can hang onto mutual funds, FIOs, ETFs, and other investments alongside an RRIF.
- You’re actually required to convert your RRSP to an RRIF. This needs to be done by the end of the year you turn 71. Until then, continue to invest your savings into an RRSP before converting the entire amount into an RRIF when that time comes.
What is the Minimum Annual Withdrawal from an RRIF?
An RRIF minimum is calculated by deducting the fair market value (FMV) of your RRIF each year. This is then multiplied to determine the minimum amount. Bear in mind that, for the first year that your RRIF is active, you don’t need to withdraw anything.
The minimum percentage you need to withdraw increases each year you get older. For example, based on this CIBC minimum withdrawal chart, an RRIF that was initiated at age 65 must have approximately four percent withdrawn each year. This increases each year until, at age 95 or older, twenty percent is required. These figures apply to RRIFs that were set up in 1993 or later.
If your spouse or common-law partner is younger than you, you can base your minimum withdrawal amount on their age. You’ll need to register that information when you open your RRIF account, however, and your choice of who’s age to use can’t be changed.
Keep in mind that an RRIF has no maximum withdrawal limit, but you will be taxed on the money that goes above the required minimum amount.
What to Do if You’re Unsure What Your Minimum is
It can be overwhelming to determine the amount you need to withdraw each year, especially if you’re not familiar with how an RRIF works. Don’t worry, however, as our team at Seniors’ Lending Centre is happy to assist! Getting in touch with our team gives you access to dedicated investment specialists who can help you better understand your finances and make informed decisions regarding them.
All in all, an RRIF acts as a hassle-free way of obtaining a set minimum amount of funds from your retirement savings each year, whenever you’d like. Of course, you should never need to guess the minimum amount you need to withdraw each year. You can contact our team to help or reach out to your financial institution.
How Much Tax Do I Pay on RRIF Withdrawals?
All RRIF withdrawals are considered taxable income, so the amount of tax you will pay will depend on how much other income you earned in the year you made the withdrawal and any tax deductions or credits that you’re entitled to.
When you file your tax return, you need to include the amount that you withdrew from your RRIF as taxable income. Your financial institution will also take a certain amount of tax from your RRIF for CRA or Revenue Quebec, commonly referred to as withholding tax, in the same way that an employer takes tax off a paycheck. The amount that’s withheld will vary between 10% and 30% of the withdrawn amount in excess of the minimum—if you only withdraw the minimum amount, there’s no withholding tax.
The lower the amount you withdrew, the lower the tax percentage. For example, if you withdrew $5000 above your minimum required withdrawal, you will likely be taxed 10%, while if you withdrew $15,000, you may be taxed up to 30%. Depending on the location and your required minimum, these amounts may differ, so it’s best to understand your financial institution’s policy.
What If I Don’t Want to Withdraw Money From My RRIF?
You must start making minimum withdrawals from your RRIF the year after you open it, whether or not you need the extra money. That means that if you open your RRIF in 2023, you have to start making withdrawals in 2024. For those under 71, you can still convert your RRIF back into an RRSP to avoid making withdrawals, though this needs to be done before the end of the year you turn 71.
If you aren’t in need of the extra money, there are ways to get the most out of your required withdrawals. Once you’ve paid the tax on it, you can put the after-tax money into a tax-free savings account (TFSA) so that any growth in that account will be tax-free to avoid paying twice.
Learn More About RRIFs
For knowledgeable assistance with your retirement savings and other investments, you can count on our team here at the Seniors’ Lending Centre. If you have questions or concerns regarding your accounts and/or retirement planning, contact our team. One of our friendly and experienced advisors will be happy to assist you in any way they can. We can also assist with credit lines, home equity loans, CHIP reverse mortgages, and more!
