Planning strategies for Registered Retirement Income Funds (RRIFs)

When a registered retirement savings plan (RRSP) matures, it is usually converted to a registered retirement income fund (RRIF).  Here are some planning strategies to help you get the most out of your RRIF investments and lower your overall tax bills. 

1.  Invest the withdrawn RRIF minimum: After the year the RRIF is established, the annuitant must withdraw the annual mandatory RRIF minimum and report it as taxable income. If you do not need some or all of the RRIF minimum, consider transferring those funds from the RRIF to a non-registered account or to a Tax-Free Savings Account (TFSA), subject to your available TFSA contribution room. It is possible for the capital to remain invested in the underlying funds while satisfying the requirement to recognize the RRIF minimum as taxable income in the year. Annuitants under age 72 can transfer all or some of a RRIF withdrawal to an RRSP and reduce the RRIF minimum for future years. 

2.  Lower the RRIF minimum by using a spouse’s age:When setting up a RRIF, an annuitant can base the RRIF minimum calculations on either their own age or on the age of their spouse or common-law partner. To maximize the amount that can continue to grow on a tax-deferred basis in the RRIF, many annuitants choose to base the calculations on the younger spouse’s or common-law partner’s age since the RRIF minimum factors increase with age and result in a larger withdrawal amount. The annuitant must make the election to use a spouse’s or common-law partner’s age before the first RRIF withdrawal. If a RRIF already exists and you want to use your spouse’s age to calculate the annual RRIF minimum, you are generally permitted to transfer funds to a new RRIF and use your spouse’s age. Discuss details of this type of transfer directly with the financial institution. 

3.  Make spousal RRSP contributions and withdrawals: Retirees often continue to pursue gainful employment well beyond the traditional retirement age of 65. Employment income continues to generate RRSP contribution room, even if the retirees can no longer hold an RRSP for themselves. However, if their spouse is under age 72, the retiree can contribute to a spousal RRSP and receive a corresponding deduction against the contributor’s income. Note that income attribution to the contributor spouse applies if the annuitant spouse makes a withdrawal before the end of the second calendar year following the spouse’s contribution. For example, a contribution made in January 2024, though deductible by a spousal contributor for the 2023 tax year, occurred in the 2024 calendar year. As a result, a withdrawal from the spousal RRSP before 2027 results in the application of the attribution rules. If that same contribution had been made in December 2023 instead, a withdrawal could occur in 2026 without triggering the attribution rules. These rules also apply to spousal RRIF withdrawals made during the attribution period, with the exception of RRIF minimum payments, which are exempt from attribution.

4.  Make final RRSP contributions at age 71: Contributions to an individual RRSP can only be made up to December 31 of the year in which an individual turns 71. For individuals who continue working into their early 70s, this age limit complicates the act of making a final RRSP contribution, as RRSP contribution room for a given year is not credited until the following year. One approach is to make a final over-contribution in December of the year the RRSP annuitant turns age 71, suffer the 1% over-contribution penalty for that month, and then be back onside in January of the following year when the room is credited to the annuitant. If the annuitant has a younger spouse, another option is to contribute to a spousal RRSP in the new year after the contribution room is credited to the annuitant. 

5.  Use pension income-splitting for RRIF income: Since 2007, RRIF annuitants aged 65 or older have been permitted to split up to 50% of their RRIF income (and other eligible pension income) with a spouse or common-law partner. There are four principal benefits of pension income-splitting: 

• Bracket management: Shifting income from a high tax bracket pensioner to a lower tax bracket spouse can reduce net taxes paid; keep in mind that this obviously increases the transferee spouse’s income, potentially triggering clawbacks or “bracket creep.”
• Old Age Security (OAS): Shifting income may reduce the income of a pensioner in the clawback range for OAS.
• Age amount (income tax credit): Shifting income may reduce the income of a pensioner over age 65 in the clawback range for the age amount; keep in mind that this may also result in a clawback of the receiving spouse’s age amount.
• Pension amount (income tax credit): Shifting eligible pension income allows the receiving spouse (over age 65) to access or increase a claim for the pension amount (federal claim of $2,000 at 15%).

6.  Consider purchasing a registered annuity: Converting an RRSP to a “traditional” RRIF is not the only option. Depending on the annuitant’s personal situation, it may make sense to purchase an annuity with some or all of the RRSP/RRIF proceeds to help mitigate longevity risk and offload investment risk to a financial institution. The downside is that your income from the annuity is taxable in the year received, and you will not be able to adjust the amount based on your personal tax situation from year to year. For example, the flexibility to redeem more than the RRIF minimum in a year with lower tax brackets and only taking out the RRIF minimum in a year with higher brackets is generally not available to annuity products. 

7.  Implement RRIF estate planning: A directly named successor annuitant RRIF designation may allow the continuation of the RRIF in the hands of the surviving spouse or common-law partner with the added advantages of easier administration, probate tax savings and a lower tax compliance burden. The successor annuitant merely steps into the place of the deceased RRIF annuitant, and the plan continues with the surviving spouse or common-law partner as the new annuitant. The process is very different (from both an administrative and tax perspective) from naming the spouse or common-law partner as beneficiary directly on the plan or through the will. Note that a successor annuitant or primary beneficiary designation directly under a RRIF is not allowed for Quebec residents and can only be made in the will.

For more information regarding RRIF and retirement planning strategies for seniors, check out the following Invesco Tax & Estate resources:

• Registered retirement income funds (RRIFs)
• Pension Income Splitting
• Aging and taxation: Retirement income and age-related tax issues

All Tax & Estate bulletins can be accessed through the Invesco Tax & Estate Resource Center.

If you have any questions, please feel free to contact Invesco’s Client Relations department.