RRIF Strategies

The Financialist • Issue 93 •April 2007
 
BY DAVID CHALMERS BA FLMI CLU CFP RFP CHFC

The acronym "RRIF" stands for "Registered Retirement Income Fund", which is the "income paying" extension of one’s RRSP (Registered Retirement Savings Plan).

Many clients reading this newsletter have already converted their RRSP to a RRIF, and will be familiar with many of the concepts mentioned in this article.

Contributions to your RRSP are tax deductible with the money growing in a tax sheltered environment until you make withdrawals. These withdrawals are fully taxable.

There are several ways of making withdrawals from one's RRSP, but the most common is a RRIF.

The friendly tax collector in Ottawa is quite keen for you to withdraw money from the sheltered environment of an RRSP and start making (taxable) income withdrawals by way of a RRIF. It’s "payback time" for all the tax you have saved to this point.

There is a deadline for making this conversion. You must convert your RRSP into a RRIF (or a life annuity, which is another option) no later than December 31 of the year of your 69th birthday. (For those born in 1938: congratulations, this is your year!)

You must start drawing income no later than the year following your "conversion". For example, if you were born in 1938, you must make the conversion before the end of 2007 and you must start drawing income no later than 2008. (You could start this year if you want).

Once you start drawing income, there is a minimum amount that must be drawn (with tax paid thereon) each year. The minimum amount can be based on your age, or on the age of your spouse/common law partner, if he or she is born in a calendar year later than you. The older you or your partner get, the greater the amount that must be drawn. There is a strange anomaly in the minimum withdrawal rules that causes an abrupt increase in the "minimum income withdrawal" in the year of the younger spouse’s 72nd birthday.

While you are not "compelled" to make an income conversion until the year of your 69th birthday, you should not necessarily wait until age 69. For many people, the best time to draw income is simply when they need it.

You may be in a situation where you are retired, not yet 69, and have an RRSP plus some non-RRSP savings. Thus, you could convert your RRSP to a RRIF to provide part of your income, and draw investment income from your non-RRSP account to cover the balance.

You could also choose to draw all of the required cash flow from your non-RRSP savings and continue to shelter your RRSP money until age 69. Or, you could convert your RRSP to a RRIF now and draw a high enough income to satisfy all of your income needs while continuing to accumulate your non-RRSP money.

There is no "hard and fast" rule as to which is the best strategy. Each of the strategies noted above will have a slightly different effect.

While there is a required "minimum" withdrawal that must be made from a RRIF, that may not be the "optimum" withdrawal. Sometimes, clients will withdraw the amount which "uses up" a low tax bracket, or the amount which keeps them at just below the threshold of the "Old Age Security clawback".

Income from your RRIF is fully taxable regardless of whether the internal investments in the account earned interest, dividends or capital gains. Conversely, in a non-RRSP investment account, more favorable tax treatment is given to dividends and capital gains than to interest.

If your overall investment portfolio is balanced (a combination of fixed-income and equity investments), it is important to ensure the right investments are held in the right account. Often we counsel a client to hold investments that generate dividends or capital gains in their non-RRSP account, and to hold investments that generate interest in their RRSP or RRIF. We don’t want to make it too easy for the taxman.

When you die, your RRIF can be left either to your estate or to a named beneficiary.

If the beneficiary is your surviving spouse, then he or she can have the money transferred on a tax-sheltered basis to his or her RRIF. If your RRIF is left to your estate or to a child, the proceeds are taxable in the year of your death.

Most people name their spouse as the beneficiary of their RRIF so that he or she can receive the proceeds without a lump sum of tax and continue receiving the income provided by the RRIF.

At the death of the survivor spouse, the entire remaining RRIF balance is taxable. As there is often a large amount of taxable income generated in a single year, a large amount of tax must be paid. (Those tax collectors in Ottawa are rubbing their hands with glee).

Some clients, who want to leave wealth to their children, church or charity, may choose a strategy of drawing relatively more money from their RRIF so that they can accumulate their non-RRSP savings which won't be as heavily taxed at death. Some clients may leave some or all of their RRIF to a charity, as one can get an unlimited charitable tax credit in the year of one's death. Some clients hold a "joint and last survivor" insurance policy to pay the anticipated tax on the RRIF. Some would rather just spend all their money.

There are numerous strategies that surround RRIFs. A bit of thoughtful advice can help you to optimize your position so that you can achieve the objectives that are really important to you. That's our job at Rogers Group Financial.