Registered Retirement Income Fund (RRIF) in Canada is an account that helps the retirees with a source of income after their retirement. The RRIF is made of the funds that roll over from an RRSP because RRSP account cannot be kept after the age of 71. In RRIF, the capital and interest that get accumulated are tax free but when withdrawal is done it is subjected to tax. A person having RRIF insurance can withdraw money from the fund at any time but an amount over a minimum level is subjected to withholding tax. The source of funds in RRIF can be another RRIF or RRSP or another pension plan.
RRIFs can be made of multiple types of investments such as mutual funds, GICs, stocks, and simple annuities. The interest in a RRIF is tax free. Once the retirement happens, the beneficiary is likely to be in the lower tax bracket. Upon death of the insured person, there is a spousal roll over option that enables the registered assets to pass tax-free to the surviving spouse. When the death of the surviving spouse happens, the entire value of the RRIF becomes taxable income.
These funds get added to other source of income that the insured person has earned during the year and the people who have modest income level will suddenly fall into the maximum tax bracket for their final tax year. This being a major disadvantage of RRIF, it is important to plan the RRIF insurance investment very well.