RRIFs, LIFs and Taxation
Any income from a Registered Retirement Income Fund (RRIF) or from a Life Income Fund (LIF) is taxable and must be added to your annual income.
In both cases, the law dictates the annual minimum withdrawal you are allowed to make. If the withdrawal is higher than the minimum, taxes are witheld at source on the exceeding amount. In Quebec, income taxes witheld (federal and provincial) will be 19%, 24% or 29%, depending on the withdrawal amount. In Ontario, federal taxes witheld will be 10%, 20% or 30%, depsnding on the withdrawal.
The withholding rate may be higher or lower than the actual tax rate that will apply to your income for the year. The adjustment will be made on your annual income tax return. To avoid a claim, you may choose to have additional taxes withheld on each withdrawal. There are also other measures that would minimize tax grabs.
If you wish to withdraw the minimum annual amount, request that the annual withdrawal limit be based on your spouse's age, if your spouse is younger. Then, your minimal withdrawal will be lower.
Does the minimum RRIF withdrawal exceed your needs?
- When you are a couple and you want to withdraw the smallest annual amount possible, you can request that the minimum withdrawal calculation be based on the age of your spouse, if they are younger than you. The minimum withdrawal will therefore be lower.
- If you must make a minimum withdrawal from your RRIF that it is not required to meet your needs, you can invest in a tax-free savings account (TFSA) in which the investment income is sheltered from tax.
Two strategies to minimize taxes
- First strategy: convert part or all of your RRSP to an amount eligible for the pension income tax credit. If you do not already have a profit, this may be desirable in some cases.
Federal: From the age of 65, you may qualify for a tax credit on the first $2,000 withdrawn annually from a RRIF or LIF regardless of your income.
Quebec: A tax credit is granted for the first $2,000, regardless of age, but this amount is reduced when family net income exceeds $32,795 (2014).
Ontario: Starting at age 65, you can take advantage of a tax credit on the first $1,337 (2014) annually withdrawn from a RRIF or LIF, regardless of your income.
- Second strategy: avoid a contributing spouse from getting taxed on RRIF withdrawals during the conversion of an RRSP to a RRIF.
If, during the current or two preceding years, your partner made a spousal contribution to your RRSP before it was converted into a RRIF, he or she will be taxed on a portion of the income from the annuitant's RRIF (three year rule) if the withdrawal exceeds the annual minimum. To avoid this, the annuitant should withdraw only the annual minimum for at least the first three years of the RRIF. As soon as three years pass without any contributions to a spousal RRSP, only the annuitant is taxed on RRIF withdrawals.
Should You Diversify Your Investment in an RRIF?
Common sense dictates that as a retiree, you should not be taking any risks with your money and should only be placing it in short-term investments. However, simply because your savings are in a registered retirement income fund (RRIF) does not mean that you should ignore short-term savings products that offer 100% guaranteed capital and returns.
When you turn 71 or 72, a wide range of options opens up. Our advice is to diversify the terms (one to five years) of guaranteed investment certificates (GICs). This way, you have access to ready cash and can benefit from better interest rates on the longer terms. You can even generate tax savings!
A Wide Range of Options
The money in an RRIF can be converted into a number of different savings and investment products without restriction. You can invest in bonds, index-linked savings accounts (ILSA) in which the capital is guaranteed, mutual funds or even stocks.
Before investing, you should decide on your financial goals, ideal returns, optimal term(s) and time frame for accessing the money, as well as your tolerance for market fluctuations.
Each year you must withdraw a minimum amount from your RRIF. Consequently, you would make some short-term investments, but the difference may be invested in the medium and long term.