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Registered Retirement Income Funds: The good, the bad and the ugly

August 27, 2018

As you approach retirement age, if you have registered retirement savings or pension plans, you’ll need to know all about RRIFs.

Unlike an RRSP, which is a retirement savings account that you deposit money into, the RRIF is designed to provide you with retirement income that you draw from.

How does a Registered Retirement Income Fund work?

When you reach 71, the savings and investments you hold in RRSP accounts must be transferred, either into a lump sum withdrawal, an annuity or a RRIF. If you have a younger spouse, you can wait until their 71st birthday.

A RRIF is a tax-deferred retirement income fund, meaning any interest or earnings within the fund are exempt from tax. However, you will be taxed on the funds you take out and you must withdraw a minimum amount every year (the calculation is outlined below).

What are your RRIF options?

You can keep the same investments you already have in your RRSPs or switch to one of these options:

  • Guaranteed Investment Certificates (GICs) or savings bonds will bring you a fixed rate of interest over a specific term. They offer low risk investments, but returns are also low.
  • Exchange Traded Funds (ETFs) and Mutual Funds provide professionally managed, diverse investments. They have a higher potential for growth, which comes with a higher risk.
  • Segregated funds are provided by insurance companies and guarantee a certain amount of your investment over a set time period. They offer better returns than GICs and less risk than Mutual Funds.
  • Self-directed RRIFs for a portfolio that you manage – only recommended for knowledgeable investors.
  • Fully managed RRIFs for a professionally managed portfolio – with management fees and a potentially high minimum investment.

What are the advantages of RRIFs?

A key advantage is growing your investments in a tax-free account, so any increases in value are not subject to tax.

From the age of 65 there is a pension tax credit available on retirement income, for which RRIFs are eligible. Only RRSPs that provide annuity payments are eligible.

You have the ability to move all of your investments over from your RRSPs to RRIFs. If you were to withdraw your RRSP investments in a lump sum, you would pay tax.

What are the disadvantages of RRIF’s?

Your investments are depleted every year. You have to take out a minimum amount, dictated by the government and based on your age, beginning the year after you set up your RRIF. At age 64, you must withdraw 4% of your total investments. At 71 it rises to 5.28% and at 85 it’s 8.51%.

You don’t have to cash in investments, however. You can withdraw funds, for example from a mutual fund or bond and transfer them into an RRSP or non-registered account, but you will pay tax on the amount withdrawn.

If you take out more than the minimum amount, you will be subject to a withholding tax of 10% for amounts up to $5,000, 20% between $5-15,000 and 30% for amounts over $15,000. You may qualify for a rebate if you pay a low tax rate.

What happens if you need to withdraw money before you’re 71?

You can convert your RRSP income into an RRIF before you turn 71 and start drawing from it immediately. However, you will be taxed on those amounts up to the minimum and charged withholding tax on any amounts above the minimum.

What is the alternative to converting RRSPs to RRIFs?

If you’re under 71 and need more income to finance your retirement, but don’t want to pay tax on withdrawals or reduce your investments, there is an alternative. A CHIP Reverse Mortgage® from HomeEquity Bank allows you to take out a tax-free loan on the equity of your home and use that money as retirement income. This way, you maximize your investments for as long as possible and you don’t have to make regular mortgage payments, so it will boost your cash flow. To find out more about a CHIP Reverse Mortgage, call us at 1-866-522-2447.

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