By the time you reach 71, you need to start taking out your RRSPs. Most people do this through RRIF, because it is the most flexible option available to you.
How Registered Retirement Income Funds (RRIFs) Work
RRIFs work on a formula based on your age and the amount of money in your plan.
Many Canadians prefer a RRIF because it preserves a high level of freedom in the money you receive post-retirement. You can still invest in what you like, enjoy tax-free growth of assets, and maintain a generally high degree of flexibility in receiving your retirement income and using it. While the annual income you receive from your RRIF is taxed, any capital or interest that the RRIF accumulates is tax free.
RRIF Income Withdrawals
When it comes to withdrawals, the RRIF has a minimum percentage payout based on a simple formula. The formula is as follows: 1/(90-age) starting from the age of 71. Generally speaking, your minimum withdrawal is at 5% at the age of 70, and slowly scales to around 10% at age 85. As stated before, withdrawn RRIF payments are considered taxable income. Therefore, it may be wise to only withdraw the amount that you need for the year, as the rest of the money in your plan remains untaxed. If you don’t have any other pension income however, it’s important to note that the first $2000 dollars is tax-deductible.
Other facts about RRIFs
You don’t have to wait to 71. You can start a RRIF as early as 55. Which may be useful where health issues are of concern.
RRIFs also provide strong flexibility in your choice of investments. RRIFs allow the same investments that are eligible in a RRSP. These include mutual bonds, stocks, corporate and government bonds, Treasury bills, mortgages, and much more. Now up to 100% of the RRIF can even be invested in foreign property. If you withdraw more than the minimum amount, the amount withdrawn above the minimum is subject to a penalty tax. If the payment is not more than $5000, it is a 10% tax, 20% tax for up to $15,000, and 30% tax for more than $15000. You can also choose to set the withdrawal percentages to your spouse’s age for tax purposes.