Retirement Income Funds (RIF): Forced Withdrawals To Trigger Income Tax
In Canada, a retirement income fund, also known as a RIF, is a specialized retirement account used to force people to withdraw from their RRSP accounts. This in turn will produce income tax for the government to collect. The conversion process must occur by the end of the year when you turn 70. If you fail to do this voluntarily your RRSPs will be de-registered automatically and become subject to tax. It is possible to convert your RRSPs into RIFs prior to turning 70, or you can have both accounts until you turn 70. But by the end of your 70th year it's best if you don't have an RRSP account.
You should check with your financial institution to learn about your options, doing a little research on your own will better prepare you for the discussions. The good news is that RRSPs and RIFs are federally regulated so all banks follow the same rules.
At age 70, you'll have three choices:
- Convert your RSP to a Retirement Income Fund (RIF)
- Convert your RSP to an annuity
- Withdraw the entire amount of your RSP in one lump sum
Each year you must make a minimal withdrawal from your RIF account and report this amount as income. This amount is determined by the government which is based on your age and/or the age of your spouse. The older you are the more, as a percentage, you must withdrawal. RIF withdrawals can be done weakly, biweekly, monthly, quarterly, semi-annually, or yearly, as long as the first withdrawal is done by the end of your 70th year. The underlying assets of a RIF account can still be in the form of investments such as mutual funds. In fact, while managing risk is important, it's probably still best to keep some of your money invested.
Once your money is transferred from an RRSP to a RIF it will be taxed. So it might be better for you to make arrangements prior to you turning 69, and each year move some funds from your RRSP to your RIF. By doing this, you control how much income will show on your income tax statement each year. The taxes you will pay as you withdraw money from your RRSP, whether to put it in your pocket or to transfer it to a RIF will be calculated based on your total income.
If you are concerned about being taxed too much, consider going back to school. The Canadian government has a program where you can use $10,000 per year, $20,000 maximum every 4 years, from your RRSPs, for eligible training or education. This applies for you or your spouse, but not for your children.
One final quirk to be aware of… If you have investment which is locked in then you need to look into a Life Income Fund (LIF). Locked in funds usually occur as a result of employer matching a portion of your investments. This matching typically carries with it restrictions on when the money is eligible to be withdrawn.
As with any investment make sure you have set up the necessary provisions for your passing. If you have a spouse make sure things are set up so that your RIFs will go to your spouse or whoever you designate.