Now that you understand how a RRIF works, you need to take the Tax Implications of RRIF Withdrawals into account to maximize your income. Not doing so could lead to lower returns in your pocket.
Taxable Income:
All withdrawals from a RRIF are considered taxable income in the year they are withdrawn. This means they are added to your total income and taxed at your marginal tax rate.
Withholding Tax:
While the minimum required withdrawal amount is exempt from withholding tax, any amount withdrawn above this minimum is subject to withholding tax at the following federal rates:
- 10% for withdrawals up to $5,000.
- 20% for withdrawals between $5,001 and $15,000.
- 30% for withdrawals over $15,000.
In Quebec, provincial withholding taxes also apply, so the rates are slightly higher.
Example: If you withdraw $20,000 in a year and your minimum withdrawal is $10,000, withholding tax will only apply to the $10,000 excess.
Impact on Other Income:
RRIF withdrawals can push you into a higher tax bracket, potentially affecting:
Old Age Security (OAS) clawbacks: If your net income exceeds a certain threshold (e.g., $86,912 for 2023), part of your OAS payments may be clawed back.
Eligibility for income-tested benefits like the Guaranteed Income Supplement (GIS).
Minimum Withdrawal Rates
The government mandates a minimum annual withdrawal based on your age and the value of the RRIF at the start of the year (January 1). The percentages are:
| Age | Minimum Withdrawal Rate (%) |
|---|---|
| 65 | 4.00% |
| 71 | 5.28% |
| 75 | 5.82% |
| 80 | 6.58% |
| 85 | 8.51% |
| 90 | 11.92% |
| 90+ | 20.00% |
Example: If your RRIF is valued at $100,000 on January 1st of the year you turn 75, your minimum withdrawal is $5,820 (5.82%).
RRIF Investment Options
You can hold a wide range of investments in a RRIF, including:
- Guaranteed Income Certificates (GICs): Low-risk, predictable returns.
- Bonds: Government and corporate bonds for steady income.
- Mutual Funds: Diversified options based on risk tolerance.
- Exchange-Traded Funds (ETFs): Cost-efficient diversification.
- Stocks: Growth potential but higher risk.
- Cash: For liquidity or emergencies.
Investments in a RRIF continue to grow tax-deferred until withdrawn. A well-balanced investment strategy can ensure your RRIF lasts throughout your retirement.
Tax-Saving Strategies for RRIF Withdrawals
Withdraw Strategically:
- Plan withdrawals to keep your income below certain thresholds (e.g., OAS clawback limits).
- Spread out withdrawals over several years instead of taking large sums in one year.
Pension Income Splitting:
If you’re 65 or older, you can allocate up to 50% of your RRIF income to your spouse for tax purposes, reducing overall taxes if your spouse is in a lower tax bracket.
Use of a Younger Spouse’s Age:
When opening the RRIF, you can elect to use your younger spouse's age to calculate minimum withdrawals, which reduces the required minimum amount and helps preserve capital.
RRIF to TFSA Transfer:
If you don’t need all the income, consider transferring after-tax RRIF withdrawals into a Tax-Free Savings Account (TFSA), up to your contribution limit, for continued tax-free growth.
To ensure your RRIF withdrawals are minimizing your tax implications, contact our office so we can review and advise you of the most efficient strategies.