Money Management Newsletter: Retirement
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
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
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
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