Beyond the RRSP
The Financialist • Issue 121 • April 2014
BY MARK NEUFELD BA CFP CIM
When you require income from your RRSP, a Registered Retirement Income Fund (RRIF) may be appropriate for you. Many clients reading this article may already have a RRIF in place so this article will serve as a refresher – for others, it will serve as an introduction to RRIFs.
An RRSP can be converted tax-free to a RRIF to establish a source of retirement income. You are permitted to convert your RRSP to a RRIF at any time – but the conversion must take place no later than the end of the calendar year of your 71st birthday.
Similar to an RRSP, within a RRIF, you are permitted to hold various types of securities (e.g. investment funds, term deposits, stocks, bonds etc.). In addition, similar to an RRSP, a RRIF lets you defer tax while you grow your money. A key difference between a RRSP and a RRIF is that you must withdraw a minimum payment annually from a RRIF. This income is fully taxable in the year it is withdrawn. You only pay tax on the money you withdraw.
The payment frequency of your RRIF can be set up monthly, quarterly, semi-annually or annually depending upon your needs. The minimum is set by the federal government (see the table on page 5 which details how the RRIF minimum payment is calculated).
“Age” is your age or your younger spouse’s age on December 31st of the preceding year. “Factor” is the percentage of the RRIF that must be taken as income. Special rules apply for “Qualified RRIFs” established before 1994.
Please note that the minimum payment from a RRIF can be based on your age or the age of your spouse or partner if he or she is younger than you. The key benefit to having the RRIF minimum payment based on a younger spouse’s age is that your minimum payment will be lower (much lower if they're under age 71) - this lets you keep more in your RRIF and defer more tax, longer. The minimum payment from a RRIF must start in the calendar year after the year in which your RRSP is converted to a RRIF.
The administrators of RRIF accounts are required to deduct income taxes from RRIF payments exceeding your minimum annual withdrawal. Since no minimum withdrawal is required the first year your RRIF is open, any withdrawal in that first year will have income tax deducted from it.
If set up properly, RRIFs can keep things simple from an estate planning perspective. You have the ability to name your spouse or partner as your RRIF's" successor annuitant" so that, on your death, they can continue taking income from your RRIF (probate fees would be avoided). Alternatively, they can transfer your RRIF to their own RRSP or RRIF, without immediate tax. If you’re single, you have the ability to name a primary beneficiary of your RRIF – in the event of your death, the funds in the RRIF would be paid to your primary beneficiary, thereby avoiding probate fees. Please note the balance of a RRIF upon death is generally fully taxable in the RRIF owner’s terminal tax return – the income tax bill can, however, be deferred between spouses (the deferral ceases upon the surviving spouse’s death). You also have the ability to name a contingent beneficiary for your RRIF should the primary beneficiary or successor annuitant not be alive at the time of your death (probate fees would be avoided).
Planning your RRIF is an important milestone in the structuring of your retirement income and your Rogers Group Financial advisor can assist you with all aspects of planning and implementing your RRIF.