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Understanding RRIFs

20 January 2015 by National Bank
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While most people understand that an RRSP is a savings vehicle that allows you to accumulate money in a tax-sheltered investment, the RRIF is the RRSP’s successor in terms of the retirement savings process. RRIFs are designed to convert that accumulated money from a tax-sheltered plan into an income stream.

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“When you retire, or no later than the 31st of December in the year in which you reach age 71, you have to shut down your RRSPs,” explains Gordon Gibson, Vice President, Market Intelligence, Strategy and Communication for the Wealth Management division of National Bank. “If you don’t do anything, the government will shut down your RRSP and everything that you have accumulated in it will become taxable income.”

The result could be losses of up to 50% of your investment in taxes, but tax legislation allows you to roll that accumulated money into a RRIF in order to continue deferring taxation on the lump sum that you have accumulated in your RRSP.

The major difference between an RRSP and a RRIF is that the latter obliges you to start taking money out on an annual basis, which can be paid in monthly, quarterly, bi-annual or annual basis. The minimum required annual withdrawal is determined by a formula that takes your age and the investment amount into account. For example, someone who converts their RRSP to a RRIF at age 71 can expect to withdraw 7.5% of their investment a year later, with small incremental increases in the formula in each subsequent year.

Investors can withdraw more from their RRIFs than the minimum amount required, but they cannot withdraw less. Additionally, all money withdrawn becomes taxable income. It should also be noted that, unlike RRSPs, investors cannot continue to contribute new money to a RRIF and its totality is derived from a one-time conversion of your previous registered plans.

“If you are very well off and won’t necessarily be relying on money in an RRSP in retirement, then you are probably better off waiting to convert it to a RRIF at age 71,” explains Gibson. “However, if you need the money to finance your retirement, then you should think about a RRIF as you head toward retirement age so that you can plan your income stream more efficiently.”

Just as there are many different types of RRSPs, you can choose the manner in which your RRIF funds are invested. The key to choosing the right RRIF for you is to understand your own needs. If security far exceeds your desire for as favourable rate of return, then your RRIF can be invested in a low-interest savings account and have free access to your money at all times. You can also invest in GICs, but the term requirements of a GIC make emergency withdrawals more difficult. Moving higher up the risk ladder, mutual funds offer greater rates of return and can be designed to balance out your need for liquidity.

To some, a self-directed RRIF is an attractive option. While the name suggests that you are going it alone, you can work with any financial advisor to build a portfolio of stocks, bonds and mutual funds that are an ideal fit for your preferred risk-return ratio

For more information on setting up a RRIF.

To calculate your minimal RRIF withdrawal requirements

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