RRIF vs RRSP: What’s the Difference?
Tiffany Woodfield, Senior Financial Advisor, Associate Portfolio Manager, CRPC®, CIM®, TEP®
Summary of Key Points
This video covers the main differences between RRSPs and RRIFs, and why you may consider withdrawing RRSP funds sooner.
An RRSP defers tax in high-income years, reduces current taxable income, and creates a future tax liability when withdrawals are made.
RRSP contribution room is set by the government at 18% of the prior year’s salary, up to a government-set maximum.*
A RRIF is the continuation of an RRSP and requires mandatory withdrawals starting the year you turn 71.*
For dual citizens living in Canada, RRSP rules are the same, and you usually do not owe additional tax to the IRS.
*These numbers could change. Please always look for the most up-to-date numbers on the CRA website.
Video Script
In this video we’re going to go through the top 3 things you need to know about the difference between RRIFs and RRSPs. You’ll also learn why you might want to take money out of your RRSP sooner.
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As a financial advisor, I often see clients who don’t understand the difference between a RRSP and a RRIF.
A RRSP is a great way to defer tax in your high income earning years but it also represents a large tax bill in the future if you don’t take steps to plan accordingly.
1) An RRSP is a savings plan set up by the government.
It allows you to pay less income tax during your high income earning years. This means you don’t pay tax on the money you put in your RRSPs, until you withdraw it at a later date.
Usually you don’t withdraw from an RRSP until you are earning less and are in a lower tax bracket. This may or not be at retirement since many people have years where they may earn less and taking money from an RRSP during these times may be strategic.
A RRSP offers an immediate benefit to your tax return. It reduces your net income which means it reduces the income tax you pay.
2) The amount you can contribute to your RRSP is called your RRSP contribution room.
It is 18% of your previous years income up to a maximum amount which is decided by the government. In 2020, the max you could contribute to an RRSP was $27,230 in 2020.
3) A RRIF is a continuation of a RRSP.
By December 31st of the year you turn 71 you have to convert your RRSP to a RRIF and start taking income the following year.
4) Finally if you are a dual Canadian/US citizen the rules are the same.
Because Canada has a higher tax regime than the US, you most likely won’t owe additional tax to the IRS even if you have an RRSP.
Do you want to understand what your options are for managing an RRSP and how you can plan an income stream that minimizes your taxes?
The first thing you should do is determine how much you spend now and how much you plan to spend in retirement.