What You Need to Know About RRIFs
Posted by Ocean Wealth
Most of us know that putting money into a Registered Retirement Savings Plan (RRSP) is one of the best ways Canadians can save for retirement. Not only are you saving for your future, but deductible RRSP contributions can be used to reduce tax. This gives you the best of both worlds, so to speak.
Alas, RRSPs aren’t without their limitations. Canadian law states that you have to convert your RRSP into some form of income by December 31 of the year you turn 71. That might not seem like a huge deal but consider the consequences. If you simply convert your RRSP into a big lump sum of cash, you could end up with a pretty hefty tax tab.
This is where a Registered Retirement Income Fund (RRIF) comes into play. These types of funds can help you bypass some of those tax woes and give you more flexibility than an annuity, for example. With our rundown of what you need to know about RRIFs, you'll be able to decide whether starting one is right for you.
How Do RRIFs Work?
The easiest way to think about an RRIF is as a complementary piece to your RRSP. Like an RRSP, they also hold several investments and allow you to defer taxes as they grow. In simple terms, it’s a registered arrangement between you and a carrier (an insurance company, a trust company, or a bank).
An RRIF lets you transfer property to your carrier from an RRSP, a PRPP, an RPP, an SPP, or from another RRIF, and the carrier makes payments to you. That said, RRIFs require minimum annual withdrawals. These are based on your age (starting the year after you open your account), and minimum withdrawals must be made until no funds remain.
You can also open something known as a self-directed RRIF, which is similar to a self-directed RRSP. A self-directed RRIF gives you the ability to control the assets of your RRSP and make the investment decisions yourself. If you add the guidance of a financial advisor into the mix, these can be an excellent option for prospective retirees.
RRIFs are a Flexible Retirement Solution
If you value flexibility in a retirement fund, you can’t do a whole lot better than RRIFs. You can customize them to match your personal income needs. This means you can dictate the frequency of income monthly, quarterly, or annually. You can keep payments the same or manually withdraw funds when you need them. There are also no maximum income amounts with RRIFs.
This really sets an RRIF apart from something like an annuity. With an annuity, your payments are set in stone as monthly, quarterly, semi-annual, or annual. You can't make changes to your plan. An RRIF, on the other hand, offers that flexibility should you need to make those changes at later on.
Weigh Your RRIF Options
Every RRIF is not created equal. All that flexibility comes with a lot of choices. Since you have full control over your RRIF, you also need to consider different income and investment types. There are RRIFs tailored towards preserving capital and others that provide the minimum level of income. You can have a self-directed RRIF as we mentioned earlier, or you can go with a GIC or mutual fund option. There are tons of possibilities.
Before you invest in an RRIF, it’s not a bad idea to do some preliminary financial planning and speak with a financial advisor. Ocean Wealth’s trusted team is backed by years of industry experience and excellence. Contact us today to find out how we can help you navigate RRIFs and all your other retirement planning needs.