3 key concepts for understanding RRIFs

Retirement is generally the time to start thinking about converting your RRSP to a RRIF.

Angela Iermieri* | Financial Planner | Desjardins Group

After RRSPs come RRIFs (registered retirement income funds). It's kind of how they continue. In concrete terms, you convert some or all of your RRSP investments to retirement income. 

RRIFs are very flexible, since you only have the minimum annual withdrawal requirement to meet. You're in charge of the rest.

Here's a short 3-part RRIF overview:

1. Conversion
Retirement is generally the time to start thinking about converting your RRSP to a RRIF. To help you, here are 2 concepts you should understand:
  • You can convert your RRSP whenever you want--even before you retire--but you must convert it by no later than the end of the year in which you turn 71.
  • You can change your mind as long as you have not yet turned 71. If you've already converted to a RRIF, but your needs have changed, you could go back to an RRSP and not have to make the required annual minimum withdrawal.  
  • You should convert before age 71 if you need to withdraw money regularly, not occasionally; otherwise, you can stick to RRSP withdrawals. However, if you're over age 65 and aren't receiving pension plan annuities from an employer, your retirement income strategy should include making RRIF withdrawals so you can get pension income credits (In 2017: $2,000 federally; $2,782 in Quebec - reduced if your family income is over $33,755). 
2. Withdrawal strategy
The amount of income you want to receive, your age and the value of your portfolio will influence your withdrawal strategy. 
  • The annual amount withdrawn can be divided into frequent regular payments.
  • All of the funds in the RRIF can be withdrawn all in one year, but think about the taxes you'd have to pay.
  • RRIF withdrawals are added to your taxable income. 
  • The minimum amount you have to withdraw every year increases with age. At age 71, the taxable withdrawal will represent 5.28% of the portfolio's value; at age 82, it will be 7.38%.
  • The age-based percentage and the value of the RRIF portfolio is set on January 1 of each year. These rules apply to all of the RRIFs you have, if you have more than one.
  • If your RRIF isn't your main source of income, it's best to make the minimum required withdrawal at the end of the year. This will give you a few more months to take advantage of growth in the tax-free income it generates.
  • If your spouse is younger than you, use their age to determine the minimum annual amount you're required to withdraw. Since the rate increases with age, the taxable amount withdrawn will be lower.  
So, for example:
    • You indicate your spouse's age--64--instead of your age--71.
    • This year, you're entitled to withdraw 3.85% of the RRIF balance, instead of 5.28%.
    • The percentage will increase every year based on your spouse's age. Result: your retirement savings last longer and you defer taxation of your income. 
  • If you include all of your investments in your withdrawal strategy, it will be easier to determine how much to withdraw annually and which investments it's best to do it in, taking your other sources of income into account.
3. Investments
All of the money in the RRIF will continue to grow, tax-free, until you take it out.
  • RRSP-eligible products are also RRIF-eligible, which allows you to transfer them directly to your RRIF.
  • Update your investor profile with your advisor. You'll be ensuring that the investment products are still right for your situation and meet your needs.
  • Keep in mind that retirement can last several decades, so your strategy must ensure that your investments continue to grow to meet your needs. Talk to your advisor and have a say in where your money goes. 
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* Financial Planner and Mutual Funds Representative for Desjardins Financial Services Firm Inc.

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