Understanding RRIFs in Canada: A Comprehensive RRIF Schedule and Guide for High Net Worth Individuals
RRIF Minimum Withdrawal
The table shows the RRIF minimum payout percentages for different ages. As you can see, the annual percentage payouts gradually increase to age 95.
| Age At Start Of Year | RRIF Minimum Payout Percentage |
|---|---|
| 65 | 4.00% |
| 66 | 4.17% |
| 67 | 4.35% |
| 68 | 4.55% |
| 69 | 4.76% |
| 70 | 5.00% |
| 71 | 5.28% |
| 72 | 5.40% |
| 73 | 5.53% |
| 74 | 5.67% |
| 75 | 5.82% |
| 76 | 5.98% |
| 77 | 6.17% |
| 78 | 6.36% |
| 79 | 6.58% |
| 80 | 6.82% |
| 81 | 7.08% |
| 82 | 7.38% |
| 83 | 7.71% |
| 84 | 8.08% |
| 85 | 8.51% |
| 86 | 8.99% |
| 87 | 9.55% |
| 88 | 10.21% |
| 89 | 10.99% |
| 90 | 11.92% |
| 91 | 13.06% |
| 92 | 14.49% |
| 93 | 16.34% |
| 94 | 18.79% |
| 95 and older | 20.00% |
* Keep in mind that different rules apply for RRIFs that were set up before the end of 1992.
For example, if your RRIF is valued at $500,000 when you're 72, at the start of the year your minimum annual payout will be $27,000 (5.40% of the value of the plan at the beginning of the year).
Make the most out of your RRIF
Imagine you are approaching retirement, and you've spent years building a substantial nest egg within your Registered Retirement Savings Plan (RRSP). Now that retirement is here, it’s time to convert your RRSP into a Registered Retirement Income Fund (RRIF). Understanding the intricacies of RRIFs is crucial, especially for high-net-worth individuals looking to optimize their income and minimize taxes in retirement.
What is an RRIF?
A Registered Retirement Income Fund (RRIF) is a government-registered account designed to help Canadians turn their RRSP savings into retirement income. While an RRSP is used to accumulate savings on a tax-deferred basis, an RRIF is used for the withdrawal phase, which means you must start drawing income from it once it’s established. This transition is often made by the end of the year you turn 71, but it can be done sooner based on your financial needs and retirement strategy.g
Once the RRSP is converted into an RRIF, your savings continue to grow tax-deferred, but there are required minimum withdrawals that must be made each year. The minimum withdrawal percentage increases with age, and these withdrawals are taxed as income. Therefore, understanding the impact of these withdrawals on your tax situation is crucial for high-net-worth individuals looking to optimize their income.
Key Considerations for High-Net-Worth Individuals
Mandatory Withdrawals and Tax Implications
Starting the year after you convert your RRSP to an RRIF, you must begin making withdrawals. The required minimum withdrawal rate increases yearly based on age, starting at 5.28% at age 71 and gradually rising over time. For high-net-worth individuals, it’s important to understand how these mandatory withdrawals could impact your tax bracket and overall financial plan.
One challenge is that RRIF withdrawals are fully taxable as income, which can lead to significant tax liabilities for those with substantial assets. Additionally, higher income from RRIF withdrawals can trigger the Old Age Security (OAS) clawback, reducing your OAS benefits. A strategic approach to managing these withdrawals can help minimize taxes and preserve more of your wealth.
Strategic Withdrawal Planning
A key strategy for high-net-worth individuals is carefully planning RRIF withdrawals to minimize the tax burden. One approach is to consider withdrawing more than the minimum amount in the early retirement years. This strategy can reduce the size of the RRIF over time, potentially leading to smaller mandatory withdrawals in later years when they push you into a higher tax bracket.
Another tactic is to convert a portion of your RRSP to an RRIF before age 71. By starting withdrawals earlier, you can spread your income more evenly throughout retirement, thus avoiding large taxable withdrawals later on. This can be especially beneficial if you have other sources of income that will be higher in your later retirement years.
Diversification and Tax Efficiency
High-net-worth individuals often have multiple income sources in retirement, such as non-registered investments, pensions, and real estate. To maximize tax efficiency, it’s important to consider how RRIF withdrawals fit into your broader financial picture. For instance, you could use RRIF income to fund tax-efficient investments in a Tax-Free Savings Account (TFSA) or non-registered accounts. This way, you can continue to grow your wealth in a more tax-advantaged manner.
Furthermore, consider the timing of withdrawals from various accounts. Drawing income from a combination of RRIFs, TFSAs, and non-registered accounts in a tax-efficient manner can help you manage your overall tax liability and ensure that your wealth lasts throughout retirement.
Practical Example: Managing RRIF Withdrawals
To illustrate, let’s consider the case of John and Mary, a high-net-worth couple entering retirement. John and Mary have substantial RRSP savings, as well as non-registered investments and a pension. They decide to convert a portion of their RRSPs into RRIFs at age 65, allowing them to begin withdrawals early and manage their taxable income effectively.
By withdrawing more than the minimum amount from their RRIFs in the early retirement years, they keep their RRIF balances lower, thus reducing the impact of increasing mandatory withdrawal rates in their 70s and 80s. They also reinvest a portion of their RRIF withdrawals into their TFSAs, ensuring continued tax-free growth of their savings. This strategy helps John and Mary manage their tax liabilities, avoid OAS clawbacks, and maintain their desired standard of living throughout retirement.
Making the Most of Your RRIF
RRIFs are a powerful tool for high-net-worth individuals to convert their RRSP savings into retirement income. However, the mandatory withdrawals and tax implications require careful planning to ensure that you can maximize your after-tax income and preserve your wealth. By understanding the rules around RRIFs and applying strategic withdrawal planning, you can optimize your retirement income, minimize taxes, and achieve financial security.
If you haven’t already, now is a great time to evaluate your current RRIF strategy. Speak with your financial advisor to create a plan that aligns with your goals and helps you make the most of your retirement. With the right approach, you can feel confident in your financial future and enjoy the lifestyle you’ve worked hard to build.
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This information has been prepared Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc. This material is distributed for informational purposes only and is not intended to provide personalized legal, accounting, tax, or specific investment advice. Please speak to a Westmount Wealth Advisor regarding your unique situation.
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