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The Money Management Newsletter: Retirement Income Planning
More points to consider re: RRIFs

In this article, we will take a closer look at RRIFs and review points that you may wish to consider.

If you are about to convert your RRSPs to RRIFs, you have three important decisions to make in the near future. You must decide on the frequency of withdrawals, the withdrawal amount and asset selection.

1. Frequency of withdrawals:

RRIF payments can normally be made monthly, quarterly, semi-annually or annually. If you convert to a RRIF this year and choose monthly payments, you will have to take the first payment no later than January of next year. If you choose annual payments, the first payment can be taken any time next year but no later than December 31st. You are not required to withdraw anything in the year that you convert to a RRIF but the option is available if desired.

Points to consider:

A ) - Taking payments annually at the end of the year will permit the maximum growth opportunity for your RRIF investments

B ) - Once you start receiving RRIF income you may have to pay quarterly income tax installments if you are not paying them already. If you take payments annually at the end of the year, the income will still have to be included for your quarterly installments and you will owe tax before you actually receive the money.

C) - With GIC-type RRIFs, most companies quote the interest rate based on annual payments. If you take more frequent payments such as monthly, you will normally receive the actuarial equivalent of the annual rate. Your contract will show the annual rate of return but you are actually receiving a lower rate because you are taking the payments more frequently.

D) - With self directed RRIFs ensure you have allowed for enough liquidity within the plan to meet the timing of your withdrawals.

2. Amount of Withdrawals:

Withdrawals can be for any amount as long as the scheduled minimum is taken each year. Unless you choose otherwise, there is no withholding tax deducted from a minimum RRIF payment. If your chosen payments exceed the minimum amount, withholding tax will be deducted from the excess over the minimum. For example, if your minimum payment is $1,000 per year and you withdraw $1,500 per year, your withholding tax will only be calculated on the $500 excess over the minimum. The withholding rates are 10 per cent for excess amounts up to and including $5,000, 20 per cent for amounts between $5,000 and $14,999, and 30 per cent for any amounts over $15,000.

Points to consider:

A) - With self directed RRIFs ensure that your investment selections will provide the liquidity to meet the amount of the payments you have chosen.

B) - GIC RRIFs will withdraw the payments directly from the investments according to the schedule chosen so there is very little management required. You will know ahead of time what your minimum payment will be each year of the selected term as well as what your end of term RRIF balance is.

C) - GIC RRIFs are however the most inflexible when it comes to making unscheduled withdrawals. Once you establish a payment amount, whether it be the annual minimum or a larger fixed amount, most GIC RRIF issuers would prefer that you stay with the schedule until the end of the interest rate term.

Some companies will allow unscheduled withdrawals while others may allow them with a penalty, so check the institution's policy before you commit your funds.

D) - With mutual fund and self directed RRIFs you will not know what the minimum payment is for the following year until after the December 31 market valuation of the portfolio.

E) - Mutual fund and self directed RRIFs are the most flexible for making unscheduled withdrawals. However, with self directed plans you will have to ensure that your investment selections will provide available resources for the payments you desire.

3. Asset Selection:

You can hold basically the same investments in a RRIF as you can in an RRSP.

Points to consider:

A) - Mutual fund and self directed RRIF portfolios are market valued every December 31 to determine the following years minimum payment. If the market is high at this time it will inflate the following years minimum. In the case of mutual fund RRIFs when the time comes to withdraw from the fund to make your payment the market could be in a trough so you will have to redeem more units to make the inflated payment. This could exhaust your RRIF faster than planned.
A similar problem can occur in self directed RRIFs with government bonds and strip bonds/coupons which you may intend to hold to maturity. The maturity value may be fixed but these bonds may be market valued at amounts substantially more that the maturity value or accrued value when rates are falling. Therefore, your minimum for the following year is again inflated. If you are only holding bonds in your RRIF you may have to redeem investments to meet the inflated payments.

In summary take some time to consider how much income you want from your RRIF and the most advantageous time(s) for you to receive it. Also ensure that you understand the pros and cons of the type of investments you are holding when it comes to liquidity, unscheduled withdrawals, and market valuation.

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