Answering your questions about RRIFs

A comfortable retirement, free of financial worries, is something we all aspire to. The reality, however, is that many Canadians overestimate what they will be worth at retirement and discover, too late, that they have insufficient resources. This scenario can be avoided through proper planning.

This does not simply mean planning when you are in your thirties and forties, making regular RRSP contributions and investing them carefully, but also making plans to meet your needs once you are actually retired. In order to make these plans, it is important that you 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, as opposed to an RRSP, 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 for protection of your hard-earned retirement savings.

Let’s dive into some of the top questions around 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 in which the funds are governed.

With locked-in RRSPs or LIRAs, you can select the following options:

• Transfer to a Life Income Fund (LIF) (All provinces except PEI and Saskatchewan)
• Transfer to a Life Retirement Income Fund (LRIF) (Alberta, Manitoba, Ontario, 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 in that your funds are allowed to grow tax-sheltered. However, a RRIF requires you to take out 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 of holding a RRIF is that it allows you to continue with the investment program that you have 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. As well, 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 cannot 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 age 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 his/her RRSP.

You can hold the same qualified investments in your RRIF as in your RRSP. If you have a self-directed RRSP, you can transfer the assets intact into a self-directed RRIF. However, some changes to the portfolio may be necessary to provide the income needed for your income payments.

Spousal RRSPs must be transferred into a spousal RRIF. As long as only minimum amounts are withdrawn from the RRIF, then no attribution rules apply and all income is attributed to the annuitant. However, if a withdrawal in excess of the minimum amount is made within three years of a spousal RRSP, then 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.

Withholding tax is not charged on the minimum payments. However, it will be charged on all amounts withdrawn that exceed the yearly minimum.

Withholding tax on three withdrawal categories:

• 10% up to $5,000 (5% in Quebec)
• 20% for $5,001 to $15,000 (10% in Quebec)
• 30% for $15,001 (15% in Quebec)

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, any payments you do take in that year will not be 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 main source of your retirement income.

If you name your spouse (or common-law spouse) as beneficiary, 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 72, 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.

This article originally appeared in Enriched Thinking.