What You Need to Know about RRSPs and RRIFs

Himani Ediriweera
 


What is an RRSP? What is an RRIF?

A Registered Retirement Savings Plan (RRSP) is a tax-free savings vehicle that drives a comfortable retirement in your golden years. Contributions made to your RRSP will not be taxed until the funds are withdrawn. Think of it as the government’s way of encouraging you to save for retirement.

A Registered Retirement Investment Fund (RRIF) is an extension of an RRSP. The year that you turn 71, you must withdraw the money from your RRSP. You can convert it, tax-free, to an RRIF. The Canada Revenue Agency (CRA) specifies that you must take a minimum amount out of your RRIF each year. This amount is taxable.

The major difference between an RRSP and an RRIF is that you can add to an RRSP (up to a maximum amount) up to age 71, provided you have income. You cannot add to an RRIF once it is established.

Both RRSPs and RRIFs allow for tax-deferred growth and government-regulated investment options — and your balance continues to grow until it’s withdrawn. The fundamental difference is that an RRSP is a tax-free savings plan used to invest for your retirement while an RRIF is a tax-sheltered account that allows you to withdraw income in retirement.
 

What are the benefits of an RRSP?

RRSP contributions lower your taxable income and allow you to save as you invest in your retirement. The sooner you start contributing, the more compounding, or interest, you earn on those savings.

An RRSP allows you to invest up to 18% of the previous year’s earnings, up to the maximum contribution limit of $24,930 (2015).

Examples:

  • Sam had an annual income of $45,000. He is allowed to place 18% of his earnings, or $8,100, into his RRSP.
  • Sarah made $150,000. She can contribute the maximum allowance of $24,930.

Any excess contribution is subject to a monthly tax.
 

Can I withdraw funds from my RRSP before maturity?

Income you earn in an RRSP is exempt from taxes unless you withdraw funds before maturity. Premature withdrawals from an RRSP account will result in a withholding tax, and the loss of tax-sheltered compounding investment room can never be recovered. Also, the withdrawal amount is added to your annual earnings and you’ll potentially have to pay when filing your taxes. Although you are able to make withdrawals from an RRSP, its primary purpose is to save for retirement, and withdrawals come at a price.

Withdrawing from an RRSP works best in your favour when you are are in a low tax bracket, like in retirement. An RRSP is as its name implies — a retirement savings plan.
 

How and when do I convert my RRSPs to an RRIF?

It’s important to know that once you near retirement, your RRSPs have to be transferred into another savings plan by December 31 of the year you turn 71. The most popular option for many Canadians is the RRIF. Consult your bank or a financial advisor about your best option.  
 

How do I receive income from an RRIF?

You must make minimum annual withdrawals, which are calculated at the beginning of each year and increase incrementally. Funds withdrawn from an RRIF are taxable income.

In the 2015 budget, withdrawal amounts were reduced from 7.38% at age 71 to 20% at age 94, to 5.28% at age 71 to 20% at age 95. This change is intended to extend the lifespan of a senior’s savings.

Any funds withdrawn in excess of your minimum are subject to a withholding tax. No withholding tax is required when you withdraw your minimum amount.
 

Withholding Rates for RRIFs (estimates)

  • 10% — 0 to $5,000
  • 15% — $5,001 to $15,000
  • 30% — $15,001 and more

Examples:

  • Sam wants to withdraw $18,000 for the year, or $1,500/month in excess of his minimum. Sam will be charged 30% for each monthly instalment and will receive $1,050/month or a total of $12,600.
  • In addition to her minimum, Sarah wants to withdraw $4,000 or $333/month. Sarah will be charged a withholding tax of 10% on the $4,000 and will receive monthly payments of $300 or a total sum of $3600.
     

Before making any decisions about your RRSP or RRIF, always get some guidance from a financial advisor so your savings will comfortably span your retirement years.