Turning age 71 and transitioning from your RRSP to your RRIF can be a confusing time. What do you need to think about and what do you need to do? What if you have a second spouse and a split family? What if you have no spouse, kids, or no kids? What are the tax implications?

In a previous post, we discussed planning considerations for the year you turn 71. Let’s now discuss the structure of your RRIF and its impact. In later posts, we will discuss the tax implications in detail and strategies around tax.

The year you turn 71, you are required to open a Registered Retirement Income Fund (RRIF). Your RRSP is then transferred to the RRIF, your investment holdings stay intact, and there are no tax implications to you. There are four important structural items to consider for your RRIF: (1) Annuitant, (2) Successor Annuitant, (3) Beneficiary, and (4) Income. Making choices around these items requires proper planning and understanding of the outcomes.

Annuitant

The Annuitant of a RRIF is the owner. There are no decisions to be made about the Annuitant. Simply put, you will be the Annuitant, or the owner, of your RRIF account.

Successor Annuitant

You can then decide to add a Successor Annuitant to your RRIF account. A Successor Annuitant can only be a spouse or common-law partner. If you name a Successor Annuitant, upon your passing, they will assume the account, the investment holdings, and the income.

If you do not name a Successor Annuitant, your RRIF account will be dissolved and closed, and the assets will transfer to the named beneficiary. Whom you name as beneficiary will have a different impact on the taxation to the beneficiary, as noted below.

Beneficiary

If you name a beneficiary of your RRIF account, they will receive the money from your RRIF account but not the account itself. Anyone can be named as the beneficiary, such as a spouse, child, sibling, niece, nephew, etc.

If you want your spouse or common-law partner to receive the RRIF money, it’s typical to name your spouse as Successor Annuitant instead of naming them as a beneficiary. This way, the account transfers over and is the simplest approach for them administratively. If you don’t name your spouse or common-law partner as Successor Annuitant and name them as a beneficiary instead, the assets of the RRIF account will be sold, the account closed, and they will receive the assets.

They can then deposit the assets to their RRSP or RRIF, and in the end, there are no tax implications if the tax filing is completed properly. This transfer of the assets is not taxed because the spouse or common-law partner is a qualifying survivor. Without proper planning and tax filing, the amount could be taxable. As spouses get older, the planning and tax filing could become less familiar to them and more confusing; therefore, naming a Successor Annuitant is recommended. A financially dependent minor child or grandchild or a financially dependent infirm child or grandchild can also be a qualifying survivor if the amount is paid as a designated benefit. The designated benefit is the amount paid as a RRIF benefit. Being a qualifying survivor allows the benefit to not be taxable to you or the beneficiary if planned and executed properly.

If you do not have a spouse, typically a sibling, child, niece, nephew, etc., is named. Upon death, the annuitant’s final tax return will include the full amount of the RRIF account, and the entire amount is taxed in the year of death. For example, if your RRIF is worth $500,000, this amount is included in your final tax return. There will be, on average across the provinces, $250,000 of tax owing. Taxation of RRIFs at death will be addressed in a subsequent posting.

Income

The year you turn 71, the RRIF account must be established and the RRSP must be transferred to the RRIF. In the year you turn 72, you are required to start taking income from the RRIF account.

The income requirements are based on a percentage of the RRIF account at the start of the calendar year. As you get older, the percentage amount increases (2.86% at age 55 and up to 20% at age 90, subject to government changes). Upon opening the account, you can select the percentage based on your age or your spouse or common-law partner's age. It’s typical to select your spouse’s age if they are younger than you. This allows for less required income to be drawn from the RRIF if not needed. You can also take any maximum amount from your RRIF.

The initial structure of the RRIF account opening and changes to beneficiaries or successor annuitant is critical to ensure that what you would like to happen to your RRIF does in fact happen. Talk to a Certified Financial Planner and Tax Advisor regarding your specific situation.