Money Management Newletter: Retirement Planning
RRIF - Registered Retirement Income Funds
Companion Advisor Article
Reedited to reflect new age limit (now age 71, changed in 2007 from
If you hold
an RRSP, you face a major decision in the year you turn 71 - what to do
with your money?
* * *
There are basically three choices:
1) Cash in your RRSP and claim it all as taxable income
2) Buy an annuity
3) Transfer your RRSP to a Registered Retirement Income Fund (RRIF)
The first choice generates a hefty tax bill and eliminates many of the
advantages of having an RRSP in the first place. Buying an annuity gives
you the security of guaranteed payments for a fixed term, or for life,
but you lose control over how your money is invested, and your payments
are not normally indexed for inflation. Your most attractive option may
be a RRIF.
You don't have to be a blues guitarist to understand RRIFs and use them
to your advantage.
You can buy RRIFs as GIC-type investments, although many people increasingly
choose mutual funds or even self-directed RRIFs that let you hold mutual
funds, stocks, bonds and mortgages. A self-directed RRIF may carry an
annual administration fee ranging from $100-$300, so the size and performance
must be high enough to justify the increased costs.
You must make a minimum annual withdrawal from a RRIF so bear in mind
that if your RRIF earns less than your rate of withdrawal, you are eating
into your capital.
When a RRIF holder dies, the money in the plan is tax deferred if the
beneficiary is a spouse or a dependent child or dependent grandchild.
RRIFs are offered by most financial institutions including mutual fund
companies, investment dealers, banks, trust companies, life insurers and
credit unions. If you buy a RRIF from any institution other than where
you have your RRSP, the transfer can take weeks so you don't want to delay.
Your RRIF must be established by December 31 of the year in which you
However, it does pay to shop around. Here are a few points to consider:
Flexibility: Is it possible to change your plan, and are there
additional fees or market value adjustments?
Protection: For GIC-type RRIFs, make sure the principal plus accrued
interest is within the limits set by Canada Deposit Insurance Corporation
or Comp-Corp for the insurance industry or your credit union plan. If
not, divide your money among issuers because you can have more than one
Security of Issuer: If your RRIF institution fails, others may
step in and honor previous commitments, but it's not guaranteed. In the
meantime, your contracted withdrawals will continue, but your capital
will be frozen.
Rates: Calculate the actual payments after all fees. If you withdraw
less than your RRIF earns in the year, does the balance earn interest
at your regular rate or less? The best test is to ask several RRIF issuers
for a printout based on the same hypothetical initial balance and constant
withdrawal each December 31 for ten years. After factoring in all fees,
the account with the highest balance has the best rate and terms of accrual.
Frequent payments: To even your cash flow, you may wish to take
payments more frequently than once a year. Is there an additional cost
or reduced interest rate for this option and can the RRIF issuer directly
transfer funds to your bank account?
These are the basic points you will want to discuss with your financial
advisor when considering the best RRIF for you. With the proper RRIF advice,
you won't be singing the blues.
Questions about the above send e-mail to:
© 1997, Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6J 5B4.