What is a RRIF?

At its simplest, a registered retirement income fund (RRIF) is the next phase of an RRSP.

In the year during which they turn 71, RRSP owners are required by the Canada Tax Act to begin withdrawing from their RRSPs; and the most common vehicle is a RRIF, which converts portions of RRSP funds into a regular income stream.

That income is, unfortunately, taxable and must be reported on your return.

RRIFs are set up by your carrier- a bank, trust company, or insurance company that's been registered with the Canada Revenue Agency (CRA)-after you transfer the funds (which CRA terms as "property"). That carrier then pays the income stream to you.

If you have more than one RRSP, you can have more than one RRIF. RRSP transfers can come from either matured or un-matured registered plans.

RRSPs generally are deemed to have matured on the last day of the year in which a taxpayer turns 71, but there are a few exceptions. Those who retire before turning 71 have the option to transfer sums from an un-matured RRSP into a RRIF.

Technically, an RRSP account owner can open a RRIF at any time, although most wait until they're 61 or older.

Establishing an income stream

The year after the RRIF is set up, CRA requires that you take a minimum yearly income-which is calculated by the carrier based on your age; or if you request it on the age of your spouse or partner.

There is a selection box for this option on the RRIF application form and it must be selected during setup, and can't be changed later. CRA does, though, make an exception if a marriage or common-law partnership breaks down.

Many people tailor their withdrawal levels to lifestyle expectations. Newly retired Canadians increasingly are taking more RRIF funds during the first 10 to 15 years after retirement, since they're healthier and want to travel or make purchases they'd deferred while raising children and saving for retirement.

As people pass 75 or 80 and become less mobile, they often scale back RRIF withdrawals for a few years, and then ramp them back up in their final years to cover late-life medical costs. While you can't, by law, withdraw less than the required minimum, you do have the option to withdraw more-although the extra sum can't be credited against the next year's minimum.

To hedge against what actuaries call longevity risk- otherwise known as outliving your money- RRIF holders keep funds not being used immediately in a variety of investment vehicles. While some seniors are willing to take on some risk, the majority opt to keep invested RRIF funds in fixed-income vehicles (such as GICs, bonds, or other safe bets).

The carrier looking after the income stream will manage these investments, but RRIF holders aren't allowed to contribute any more funds once the account is established.

Other income options

While a RRIF is a convenient way to create an income stream, CRA does permit other options.

Account owners may withdraw the lump sum-although that will be counted as income and subject to withholding tax. Or, the account owner can commute the RRSP funds to purchase an annuity designed to create a retirement income stream.

Tax treatment for an annuity is similar to that for a RRIF-only the yearly annuity income received by the retiree is taxable.

CRA does deem certain annuities to be eligible, and others not, so seek documentation from the annuity provider before committing to a purchase; because if you have a large commutable sum in your RRSP, and no tax deferment, the consequences can be devastating.