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Key takeaways:
A comfortable retirement, free of financial worries, is something we all aspire to. However, many Canadians overestimate what they will be worth at retirement and discover, too late, that they don’t have as much savings as they need. This scenario can be avoided through proper planning.
Being prepared doesn’t only mean starting to plan in your thirties and forties, making regular RRSP contributions and investing them carefully, but also setting yourself up to have your needs met once you are actually retired. To plan successfully, it’s essential to understand your alternatives for retirement income.
One of the best options available to retired investors is a Registered Retirement Income Fund (RRIF). A RRIF is essentially a continuation of a Registered Retirement Savings Plan (RRSP), except that the purpose of a RRIF is to provide a source of income during retirement. The accumulated funds in your RRSP are simply rolled over into a RRIF at age 71, providing the same tax sheltering as before. Because RRSPs must be collapsed by December 31 of the year in which you turn 71, RRIFs are an excellent choice to protect and benefit from your hard-earned retirement savings.
Let’s dive into some of the top questions about how RRIFs work.
It is mandatory to collapse an RRSP before the end of the year in which an individual turns 71.
Take your RRSP funds in a cash payment and pay tax on the full amount
Transfer into a Registered Retirement Income Fund (RRIF)
Purchase an annuity
Yes, you can transfer into any of the maturity options at an earlier age if you need the income.
You can transfer part of your RRSP to one or a combination of the options at any time. However, by December 31 of the year in which you reach 71, you must have transferred all of your RRSP holdings.
Like a regular RRSP, the maximum age at which you must collapse your locked-in RRSP/LIRA is 71. The minimum age will differ based on the province where the funds are governed.
With locked-in RRSPs or LIRAs (Locked-In Retirement Accounts), you can select the following options:
- Transfer to a Life Income Fund (LIF) (All provinces except PEI and Saskatchewan)
- Transfer to a Locked-In Retirement Income Fund (LRIF) for Newfoundland and Labrador only
- Transfer to a Prescribed Retirement Income Fund (PRIF) (Saskatchewan and Manitoba only)
- Transfer to a Life Annuity (all provinces)
A RRIF is like an RRSP where your funds are allowed to grow tax-sheltered. However, a RRIF requires you to withdraw at least a minimum amount each year as income. There is no maximum amount you can withdraw. All amounts withdrawn are taxed as income.
The biggest advantage to holding a RRIF is that it allows you to continue with the investment program you have already established and therefore, provides the most flexibility of all your retirement income options. You can elect to take payments beyond the required minimum, and you have the ability to change your investments should your circumstances or the markets change. Also, a RRIF offers protection from inflation by allowing you to increase the amounts of your payments over the years to keep pace with your higher living costs.
No, you can’t make contributions to a RRIF. The only new funds that may come into your RRIF are transfers from other RRSPs or RRIFs. If you are under 71 and have a RRIF, you can continue to hold an RRSP and make contributions. Or, if you are over age 71 but your spouse is younger, you can continue to make spousal contributions to their RRSP.
You can hold the same qualified investments in your RRIF as in your RRSP.
Spousal RRSPs must be transferred into a spousal RRIF. As long as only minimum amounts are withdrawn from the RRIF, no attribution rules apply, and all income is attributed to the annuitant. However, if a withdrawal over the minimum amount is made within three years of a spousal RRSP, that income will be attributed back to the spousal contributor.
The 2015 Canadian Federal Budget set new minimum RRIF withdrawal limits. The minimum amounts are calculated as a percentage of the value of your RRIF on December 31 of the previous year. Visit the Canada Revenue Agency (CRA) website for information on calculating the minimum withdrawal amount.
When you withdraw money from your RRIF, your financial institution will withhold a certain amount for taxes and pay it directly to the government on your behalf. Think of this withholding amount as a pre-payment of the tax you’ll owe on that income.
Withholding tax is not deducted from minimum payments. However, it will be deducted from all amounts withdrawn that exceed the yearly minimum. Here are the current withholding tax rates.
The only year in which you are not required to take a minimum payment is the year in which you open the RRIF. As a result, the funds withdrawn are considered an excess amount and are subject to withholding tax.
Using a younger spouse’s age to calculate your RRIF payments does not mean you can defer taking minimum payments. Instead, using your younger spouse’s age will result in lower minimum payments, which could result in more growth potential for your RRIF. This is a good strategy if you do not need your RRIF income as the primary source of your retirement income.
If you name your spouse (or common-law spouse) as beneficiary, in case of your death, they have the following options:
- Payments may continue with your spouse as successor annuitant;
- Your spouse may collapse the existing RRIF and roll the funds into a new RRIF with a new payment schedule;
- Your spouse may roll the RRIF into an RRSP if they are less than age 71 or;
- Your spouse may elect to collapse the RRIF and take the funds as taxable income in one lump sum payment.
Your Scotiabank advisor can provide you with more information on estate and tax planning.
