When it comes to managing money in retirement, most Canadians choose a Retirement Income Fund (RIF). A RIF is the most flexible way to manage and control retirement finances.

What is a RIF?

Think of a RIF as an RSP in reverse. Instead of contributing to your retirement savings, you use a RIF to withdraw income for retirement. The untouched portion continues to grow tax-sheltered, just as it does in an RSP. You can no longer contribute new tax-deductible funds, but you can manage your investments in the same way you do with an RSP.

You can convert RSP savings into a RIF any time. But you must convert your RSP to a RIF or other income option by the end of the year in which you turn 71.

Benefits of a RIF

Flexibility is the key advantage of a RIF. Plus, the money that stays in the plan continues to benefit from tax deferral. So any funds not used for income still have the opportunity to grow.

A RIF lets you withdraw as much or as little as you want from your retirement savings, subject to a yearly minimum. If you decide you need more or less income, you can adjust withdrawals to suit your needs. You retain control over your investments, just as you do with an RSP. The same investments that are eligible for an RSP can be held in a RIF.

How RIF Payments Work

You can structure a RIF to provide payments according to the schedule you want. Many people prefer monthly payments, but semi-annual and annual options are available. Or you can simply withdraw lump sums.

Payments can be any amount you choose. However, you must withdraw a minimum amount every year, as stipulated by federal government regulations. The minimum is calculated as a percentage of the plan's total value on January 1 each year. The percentage depends on your age at the beginning of the year. For example, when you are 71 you must withdraw 5.28% of the fair market value of the RIF. When you are 85, it is 8.51%. If you have a younger spouse, the minimum annual payment can be based on his or her age. This enables couples to leave money in a RIF longer, taking maximum advantage of tax-deferred growth and inflation protection.

RIF payments are considered taxable income in the year they are withdrawn, so they'll be added to your other income sources for tax purposes. Payments are also subject to a withholding tax, which depends on the amount of withdrawal and your province of residence. Get more information on the withholding tax.

* Keep in mind that different rules apply for RRIFs that were set up before the end of 1992.