Registered Retirement Income Funds, or RRIFs, are a very popular choice for people who have to wind up their RRSPs. Their flexibility makes them an attractive alternative to annuities – especially if interest rates happen to be low.
A RRIF provides you with the same investment options your RRSP did – GICs, bonds, stocks and mutual funds. Inside your RRIF, your assets continue to grow tax-defered until you withdraw them. You maintain control over how your savings are invested, and can make transactions and rebalance your portfolio according to changing market conditions and your personal needs.
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The major difference between the two savings vehicles is that you cannot contribute to a RRIF as you did into your RRSP. Instead, a RRIF requires you to withdraw a minimum amount each year. You must start taking payments from your RRIF the year after you open it. But you can withdraw as much or as little as you want, provided you withdraw the annual minimum required by Canada Revenue Agency (CRA). That means you have the flexibility to access extra funds if and when you need them.
The minimum withdrawal levels are based on your age. However, when you open a RRIF, you can choose at that time to have your withdrawals based on your spouse's age. Since minimum withdrawals increase as you get older, using a younger spouse's age to set the level can be a good idea. This will permit you to take smaller amounts out of your RRIF each year, thus deferring income tax on the bulk of your retirement savings as long as possible.
Until recently, you had to wind down your RRIF by the end of the year during which you turned 90. Now CCA allows you to maintain your RRIF indefinitely. You must, however, start withdrawing 20% of your remaining funds each year once you hit age 94 (or, alternatively, when your spouse does).
What type of investments can I have with a RRIF?
A RIF provides you with the same investment options your RRSP did – GICs, bonds, stocks and mutual funds. Inside your RIF, your assets continue to grow tax-free until you withdraw them. You maintain control over how your savings are invested, and can make transactions and rebalance your portfolio according to changing market conditions and your personal needs.
How much do I have to withdraw each year from my RRIF?
A minimum amount must be withdrawn each year based on a set formula that takes into consideration the planholder's age (or the age of his/her spouse) and the market value of the assets in the plan as at December 31st of each year.
When must I convert my RRSP to a RRIF?
An RRIF can be opened at any age, but new contributions can never be made into the account at that point. Keep in mind that you must convert your RRSP into a RRIF no later then age 71.
What would happen to my RRIF Account upon death?
RRIFs are also quite flexible from an estate-planning point of view. You can have your RRIF make payments to your surviving spouse after your death by making him or her, your successor annuitant. Or, you can name a beneficiary who will receive the remainder of your funds as a lump sum. If you don't have a beneficiary, your RRIF will revert to your estate.
Which should you choose?
There are four basic features that tip the scales in favour of RRIFs over annuities for most people:
1. You Keep Control: If you buy an annuity, you hand over your money to an institution generally an insurance company and they invest it and pay you out a set amount. With a RRIF, however, you maintain control over your money. You can invest it as you see fit in a style that you're comfortable with – and that will meet your needs and goals.
2. Customizable Cash Flow: An annuity provides you with fixed regular payments based on interest rates at the time you make your purchase. A RRIF, by contrast, gives you more flexibility. As long as you take out the minimum required each year, you are free to decide how much you withdraw thereafter. That means you have a pool of capital you can easily tap, whether for special needs like an around-the-world cruise, or to meet unexpected costs, such as an unexpected medical bill.
3. Enhanced Returns: Because an annuity guarantees you a set level of payments, the sum you receive will often be determined by the current interest rate environment. A RRIF can provide serviable income and investment options rates.
4. More Purchasing Power: A RRIF may help in the battle against inflation. Because you decide how much to withdraw each year, it's a simple process to increase your income if and when inflation strikes. And because you can select your investments, you can actually take advantage of rising rates with the flexibility to shift your money into higher-yielding investments.
To get the best of both worlds - predictability plus flexible income and investment options - consider purchasing a life annuity with some of the proceeds from your RRSP, and putting the rest into a registered retirement investment fund (RRIF) or a life income fund (LIF), if your funds come from an RPP. The annuity could provide you with a dependable income stream, while the money in your RRIF provides flexible investment options.