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Anthony Layton MBA, CIM

Chairman & CEO, Portfolio Manager

Peter Guay MBA, CFA

Portfolio Manager
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  • T514.875.7566 x 224
  • 1.800.875.7566
  • F514.875.9611
  • Place Alexis Nihon
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  • Montreal, Quebec H3Z 3B8
December-12-17

Setting up your RRIF: What you need to know

You spent your working years diligently putting money into your RRSP and watching it grow. Now that retirement is near, it’s time to start reaping the rewards of your hard work.

For most people, this is when they convert their RRSP into a Registered Retirement Income Fund, or a RRIF. What is a RRIF? How does it work? Let’s have a look.

Most Canadians chose to convert their RRSP accounts in to a Registered Retirement Income Fund, or RRIF. Like your RRSP, a RRIF is a registered account, regulated by the Canadian government.

Here are a few things you should know about RRIFs before you sit down with your advisor.

  • You can hold the same investments in your RRIF as you did in your RRSP.
  • There are no capital gains triggered when you convert your RRSP to a RRIF, and those investments continue to grow tax-free while they’re in the account.
  • A RRIF can only be funded by a transfer of investments from your RRSP or, in some cases, from an employer’s deferred profit sharing plan.

A more popular option than annuities

Instead of using a RRIF, you could choose to convert your RRSP to an annuity which is vehicle offered by insurance companies. However, the payout rates of annuities are greatly affected by interest rates, which are now relatively low by historical standards—making annuities not a very popular choice.

You must roll your RRSP into a RRIF by December 31st of the year you turn 71. You can do it any time before the age of 71, but once the RRSP is converted into a RRIF, you can no longer make contributions.

We usually recommend that our clients wait as long as possible before RRIFing. That way they can continue to get the tax benefits of their RRSP, and postpone mandatory RRIF withdrawals.

That’s right, once your money is in a RRIF, you have to withdraw a portion of the funds each year.

This starts the year after the plan is set up. The withdrawals are calculated as a percentage of the market value of your RRIF at the beginning of each year. Your financial institution should inform you of this amount. It’s important to note that if you have multiple RRIFs, you must withdraw the minimum from each account.

Minimum withdrawals you must make each year

So, what are the minimum withdrawals? Well, when you’re 65 years old it’s 4 per cent of the value of your RRIF. It rises gradually each year to 5.28 per cent at 71 and keeps rising thereafter until topping out at 20 per cent at age 95 and over.

If your spouse is younger than you, you can use their age to calculate your minimum withdrawal. And, when you’re preparing your annual tax returns, you can elect to split the income from your RRIF with your spouse to reduce your tax bill.

Yes, tax. The income tax that was deferred when you contributed to your RRSP, is payable now that you’re making withdrawals.

If you elect to only receive the minimum amount from your RRIF each year, there is no tax withholding. And that means you need to ensure that you set enough aside to pay the income tax.

You can decide to draw more than the minimum out of your RRIF in a calendar year. If you do, the taxes will be withheld at source, but only on the amount over the minimum. If you prefer to have the tax withheld at the source for your RRIF withdrawal, minimum or otherwise, you can instruct your financial institution to do so.

You choose what you do with your withdrawals

It is up to you to choose what to do with your RRIF payments. If you need to finance your lifestyle you can have monthly withdrawals sent to your bank account. Or you can transfer securities in-kind to your taxable investment account or TFSA.

When you’re setting up your RRIF, you transfer the investments you had in your RRSP directly into it. And the investment strategy we recommend stays pretty much the same.

As much as possible, you should keep your bonds and other interest-paying investments in your RRIF where they are tax sheltered. This is because interest is taxed more heavily than dividends paid by equity investments.

You will also need to select a beneficiary of your RRIF – in the event that you die. If your spouse—either married or common-law—or a financially dependent child, or grandchild, is named as the beneficiary of your RRIF, income tax can be deferred. To get this deferment, the funds must be transferred to the beneficiary’s RRSP, RRIF, annuity or registered disability savings plan by December 31st of the year following your death.

Your RRIF can roll over to your spouse upon your death

You can also designate your spouse as a successor annuitant. When you do this the RRIF account doesn’t have to be collapsed and instead it can simply continue under your spouse’s ownership. If that person is under 71, he or she can convert the RRIF back into an RRSP.

If the beneficiary is someone other than a spouse or a dependent, you are deemed by the tax department to have received an amount equal to the value of the investments in the RRIF immediately before your death. This amount is included in your final income tax return and is taxable.

Lastly, you might be eligible for some tax savings using a RRIF. If you’re 65 or over, and have no pension income, you can apply the federal pension income tax credit to income from your RRIF.

You can open a RRIF and do what’s known as a partial rollover. This means you transfer only part of the money in your RRSP into the RRIF. If you rollover $12,000 at the age of 65, you can draw out $2,000 dollars annually for the next six years to take advantage of the pension credit until you’re 71.

As always, it’s a good idea to get the help of experienced professionals to help you with your RRIF conversion as part of a comprehensive financial plan, covering tax and estate planning.

 

By: Anthony Layton | 0 comments
December-05-17

End of Year Tax Planning

Welcome back to “Do It Together” financial planning. In my last housekeeping video I spoke about keeping your financial house in order including going over the documents you need to review and update every year to stay on top of things. Today's video looks at five things you can do to reduce your tax bill for 2017 as the year comes to an end. They're really simple but can lead to a pretty significant reduction in your tax bill. I also briefly discuss the changes to private company taxation recently revealed by Finance Minister Morneau.

As always, don't forget to subscribe and if you have any questions, let me know and I'll address them in a future video or blog post.

 

By: Peter Guay | 0 comments