Is an RRIF the best option for your RRSP?
Most people choose an RRIF for the flexibility they offer and there are a number of ways to make it work for you (Getty Images/Hero Images)
If you have been using an RRSP to save for retirement, there inevitably comes a time when you will need to start withdrawing the funds. And although you can wait to a certain extent, tax rules require you to withdraw from your plan no later than the end of the year in which you turn 71.
When you enter what is sometimes called the “decumulation” phase, you have three basic choices: you can convert the plan to a Registered Retirement Income Fund (RRIF), buy an annuity or take the entire amount in cash (or choose a combination of any of these options).
The most popular option by far, however, is an RRIF. [See Converting your RRSP to a RRIF: get your timing right]
“About 80 per cent of people take that route,” says Faisal Butt, an investment adviser with Edward Jones. “An RRIF is similar to an RRSP, except that you use it mainly to distribute money. And although you can’t make any contributions to the plan, your underlying investments can continue to grow within it.”
PROs OF AN RRIF
Most people choose an RRIF for the flexibility they offer. For example:
Conversion is easy. You don’t need to sell the investments in your RRSP. “Like an RRSP, an RRIF is simply a holding vehicle for investments—it’s not an investment,” says Michael Deepwell, CPA, CA, principal at Lamp Financial. “So you can continue owning the same assets you had in your RRSP.” (If you plan to convert before age 71, double-check with your financial institutions, as there are different policies about transferring investments from an RRSP to an RRIF before age 71, says Deepwell.)
You can remain in the driver’s seat. Once your assets are transferred to an RRIF, you can continue to shift them around to match your investment and risk preferences, just as you would with an RRSP—for example, you might want to reduce your exposure to equities and buy fixed income investments.
You can continue to defer a portion of your income taxes. As with an RRSP, the assets held in your RRIF will continue to grow tax deferred.
You can arrange for a tax-free rollover in certain situations. Funds remaining in your RRIF when you die will be included in your terminal tax return. However, your executor can arrange for an effectively tax-free rollover in some cases—for example, if you leave it to a spouse, common-law partner or financially dependent minor child.
You can name a beneficiary. If you do, funds remaining in your RRIF when you die can bypass your estate and be excluded when the probate fee/tax is calculated (where applicable). However, your estate generally has the obligation to pay the tax on the RRIF income reported on the final return of the deceased. If it ends up holding insufficient funds because of the RRIF beneficiary designation, then CRA has the right to receive payment from the beneficiaries—and that can come as a big surprise to them.
CONs OF AN RRIF
Experts generally agree that RRIFs have few drawbacks. But they can be major, depending on your situation.
You must make minimum annual withdrawals. Once you convert your RRSP to an RRIF, you are required to make withdrawals at least annually, and these are included in taxable income for the year, says Deepwell. The withdrawal rates are determined by your age and the value of the plan, and they increase over time.
You carry the risk of outliving your money. As Jason Heath, a planner at Objective Financial Partners Inc., explains, “If your RRIF isn’t generating a return in excess of the withdrawal rate, you will be drawing down on the capital in your account over time.” That means you could run out of money prematurely—and the longer your live, the greater the risk.
If, despite the drawbacks, you decide that an RRIF is your best option, there are a number of ways to make it work for you. As always, review your options with your tax accountant and financial adviser.
IS RETIREMENT PLANNING ON YOUR MIND?
CPA Canada has a full suite of resources that can help with retirement planning, including Understanding RRSPs and TFSAs and The Procrastinator’s Guide to Retirement. To plan a financial literacy session in your community, see Planning for retirement.