What is a Registered Retirement Income Fund?
Throughout your career, you have always been cautions with your spending and have always told yourself you won’t retire unless you have enough funds. You have squirreled money away into your Registered Retirement Savings Plan (RRSP). That is great. You are prepared for your future! But what happens next?
You cannot keep your money in your RRSP forever. The plan can only hold your savings until the end of the year when you reach 71 years old. Your future route will be based on either of the two options. The first would be entirely withdrawing all of your savings fully, and the second option is transferring all your savings from the RRSP to your Registered Retirement Income Fund (RRIF) account.
Work with you accountant to get the right advice. Most likely, they will recommend for you not to withdraw all the funds otherwise it will be considered taxable income. Instead, leverage it as a stable income source throughout your retirement.
Here is what you need to know about RRIF as an investment.
Definition of a Registered Retirement Income Fund (RRIF)
The RRIF works just like an extension for your Registered Retirement Savings Plan (RRSP) under the Canadian Tax Law. It is your account registered with the federal government, which is being regulated by the Canada Revenue Agency. It has a reverse function compared to an RRSP. Instead of placing more income to your account, you will be gradually withdrawing your savings to fund yourself throughout retirement. What is great about it is that you have the liberty to open multiple RRIF accounts as well.
Benefits of Investing in Registered Retirement Income Fund
What is so enticing about the RRIF? Here are four reasons why you should consider applying for an RRIF.
- Tax deferral. Your savings within your RRIF account can grow in a tax-sheltered environment. There will be no tax deductions while you keep your retirement funds in.
- Controlling Your Funds. You can withdraw depending on your preferred frequency. You can choose either annually, semi-annually, or quarterly. The good note is that there is no maximum amount of withdrawal. However, there is a minimum amount based on your age, which will be discussed later.
- Transfer benefit. Upon death, your funds can be considered as taxable income. There is an option though to transfer your earnings to the RRSP or RRIF of your spouse. The transfer can also apply to your financially-dependent children. The considerable age is under 18 years old, or if your child has a disability. The remaining savings can be continuously transferred to the registered beneficiary after you have passed away.
- Investment control. You can choose how you would like your savings to grow with the help of a professional.
Applying for a Registered Retirement Income Fund
You will have to first apply for an RRIF with any of the following carriers:
- Insurance Company;
- Trust Company;
- Credit Unions and Caisses Populaires;
- Investment firms; and
- Mutual Fund Companies
Take note that you can convert your RRSP to an RRIF from any of the carriers up to December 31st of the year you will be turning 71 years old.
Allowed Contributions to your Registered Retirement Income Fund
Once you make your application, you will have to consider the contributions possible that will be transferred into your RRIF. You can either transfer from your Pooled Registered Pension Plan (PRPP), or your unmatured or matured RRSP. For the unmatured RRSP, you can prioritize the plan wherein your spouse or common-law partner is filed as your annuitant. You can check out this link on how to receive income, as well as possible deductions to your RRIF
Once you have settled with your RRIF account, you can no longer contribute to the fund. Note that you cannot transfer your retirement allowance to the RRIF. Do not worry if you have additional sources for your funds. You are certainly allowed to create multiple accounts of RRFIs.
Withdrawing from your Registered Retirement Income Fund
Next, you may start withdrawing after a year the plan was created, depending on preferred frequency. There is a minimum obligatory annual withdrawal depending on how old you are. The percentage increases as you get older. The starting minimum amount is 5.28%. For the 95 years and older, you will have at most 20% as your minimum amount. For a quick calculation, you may visit an RRIF calculator to better plan your withdrawals. Since it is the minimum, you will not necessarily pay for the withholding tax.
Although you have the regulation in your funds, withdrawing from your RRIF is considered as a taxable income. The withdrawal amount is accounted for under “other income.” That is why you must withdraw on time, or evaluate the amount you will be withdrawing in a given period. If you can keep on track with your withdrawals, you would not have to be unnecessarily placed in a higher income tax bracket.
Upon withdrawing your savings, you will have to pay the following withholding tax:
- 10% (5% in Quebec) on amounts up to $5,000
- 20% (10% in Quebec) on amounts from over $5,000 to $15,000
- 30% (15% in Quebec) on amounts over $15,000
- For non-residents of Canada, you will have to pay a standard 25%
If you have a spouse that is relatively younger than you, it is advisable to let them withdraw your money. Their minimum withdrawal rate shall be comparatively lower than yours. Therefore, the withholding tax you will have to pay shall be lowered.
Investment Options for your Registered Retirement Income Fund
Now, this is the best time to consider if you are reliant on the payouts per each year from your savings. If you have the flexibility in allowing your savings to grow within your profile, do not withdraw all your savings. Maximize the eligibility for benefits you can achieve with the government as you sustain your RRIF. Also, you can venture out on the following options for your savings to grow tax-free continuously.
- Guaranteed Investment Certificates (GICs). This is a type of Canadian investment wherein there is a full guarantee for the rate of returns. An additional interest-earning shall be included in your initial investment. This is the best option for you if you prefer little risks in your investment.
- Mutual Funds. You will be investing in a pool of stocks, bonds, or securities held by a money manager. They will be in charge of monitoring the market. To know more about the best mutual funds available, you can check out this link.
- Portfolio Solutions. The accumulation of holding a mutual fund is what we call a portfolio. Relying on a money manager, they will be handling your portfolio in investing with great diversity.
- Savings Deposits. If you plan not to expose your savings at high risk, you can opt to have your funds with accessibility. An interest-based on the amount of your savings will be received throughout.
It would be best to let a financial advisor manage your investments. They are knowledgeable in keeping your money growing throughout the time of investment.
Other Ideas For Passive Income
The RRIF is an excellent way for you to earn without working. If you are still finding other means of earning passive income, you can also consider non-traditional ways to make money by visiting this website. This will depend on what your capabilities and passions are. If you are into traveling around the area, you may consider being a driver.
You can also work in becoming a host to your potential international friends, to give knowledge on what is happening in your city. A lot of options are available in the link provided. Another suggestion would be investing in currencies. It is the most liquid market fit for any type of risk-takers.
Although, if you would like to motivate another individual, you may consider becoming a life coach as well upon your retirement. This can regulate the transfer of ideas between you and the next generation. You can check out more of it through this link.
Is having the Registered Retirement Income Fund Worth It?
Yes, it is! Regardless of the withholding taxes, applying for an RRFI can help you create a pace throughout your retirement. There are a lot of options to expand your savings without doing any work. You should explore these options while enjoying your life, focusing on your family or hobbies. Work it out by asking for help from a financial advisor. You will not have to monitor your savings yourself.
As time goes by, you are not getting any younger. It is excellent that you have been saving up for your retirement, but do not be too cautious to keep your savings until the end. Given the earnings accumulated through your hard work, it is best to let your money work for you now. Continuously enjoy the benefits you have been saving up over the past decades. Also, ensure life to the ones you will be leaving behind.
If you want to know more about what RRIFs are, you may check out RRSPs & RRIFs for Dummies by John L. Reynolds and Charm Darby.