The registered retirement savings plan (RRSP) is the vehicle of choice for retirement savings in Canada - and it pays to maximize your contributions during your working years.
But eventually, as you phase out of the workforce or retire, you'll need to convert those retirement savings into retirement income. RRSPs have a limited shelf life, and must be wound up by the end of the year in which you reach age 71. They are also fully taxable if withdrawn in cash. So, what can you do to more effectively turn your savings into retirement income? One of the most effective options is to open a registered retirement income fund (RRIF) - one of the most flexible and tax-effective ways of generating income in retirement.
What's a RRIF?
A RRIF is really a continuation of your RRSP, but with a twist: you can't make regular contributions to a RRIF - only withdrawals. That's because the main purpose of a RRIF is to provide a source of ongoing retirement income. Here's how a RRIF works:
- Transfer assets in. A RRIF can only be funded by a transfer of assets from RRSPs or RRIFs owned by you or a deceased spouse/common-law partner, a registered pension plan or a deferred profit sharing plan. You can't make contributions to a RRIF (with some rare exceptions).
- Keep savings tax-sheltered. Like an RRSP, a RRIF is a tax-sheltered vehicle in which you make the investment decisions. You have complete flexibility in tailoring an investment strategy to meet your financial needs.
- Make ongoing withdrawals. Each year, you must withdraw a minimum amount from your RRIF. The minimum withdrawal is based on a percentage of your RRIF assets and increases with your age. For example, the minimum RRIF withdrawal rate is 7.38% at the age of 71 (the last year in which you can hold an RRSP) and levels off at 20% at 94 years and over.
Just like withdrawals from an RRSP, all withdrawals from a RRIF are taxable, and there is no maximum withdrawal limit.
Why use a RRIF in retirement?
There are several reasons why people use RRIFs as a means of growing and generating their income in retirement:
Flexible withdrawals. RRIFs give you a significant amount of flexibility in structuring your retirement income plans. For example, you may want to take out more money in your early, more active retirement years, and reduce your withdrawals later in life. Or you might take out more later in retirement to cover additional medical expenses that you incur. You may also want to withdraw more at a certain time of year (winter vacations for example) to match your anticipated expenses. RRIFs give you the flexibility to withdraw retirement income as you need it.
Continued tax sheltering. While you have to take a minimum amount out of your RRIF each year, the remainder stays tax sheltered. That means your RRIF investments can continue to grow on a tax-deferred basis during your retirement. With many people living 20 to 30 years in retirement, this tax sheltering can provide much needed compounded investment growth.
Control over your investments. You have the same investment choices for a RRIF as you do with an RRSP. If you've developed an investment strategy to save for retirement, you can also design an investment strategy to meet your retirement income needs.
If, for example, you retire early and expect to live into your eighties, you might allocate a portion of your RRIF to higher risk investments (such as equities) to take advantage of the higher potential returns over the long term. Or, if security is your primary concern after retirement, you can weigh your investments more heavily in guaranteed income products. With RRIFs, the choice is yours.
Option to convert to an annuity later. If you reach a point in your retirement where a guaranteed stream of income is a more important priority than investment flexibility, you can transfer some or all of your RRIF assets to an insurance company to purchase an annuity, while still maintaining the tax sheltered nature of the assets. You only pay tax on the annuity payments as they're made to you.
For your locked-in savings: LIFs, LRIFs, RLIFs and prescribed RRIFs
While RRIFs are great for people who have RRSPs, many people have money in registered pension plans or money that they've transferred out of a pension plan to a locked-in RRSP or locked-in retirement account (LIRA).
RRIFs are not an option for locked-in savings, however, three similar retirement income vehicles - Life Income Funds (LIFs), Locked-in Retirement Income Funds (LRIFs) and Restricted Life Income Funds (RLIFs) - operate much like RRIFs and are designed to hold locked-in savings.
LIFs, LRIFs and RLIFs have the same minimum withdrawal feature as a RRIF, but in addition, set maximum withdrawal limits each year. The formula for calculating this maximum withdrawal differs, so you'll want to discuss with a CIBC advisor. Some locked-in legislations have also introduced a new income vehicle for locked-in savings - a "prescribed RRIF" - that requires a minimum withdrawal each year but has no maximum withdrawal restrictions.
The availability of LIFs, LRIFs, RLIFs and prescribed RRIFs depends on whether federal or provincial law governs your locked-in funds and, if provincial, which province.
Get the expertise you need from a CIBC advisor
If you're within a few years of retirement, or turning 71 this year, don't wait until the last minute to develop a retirement income strategy. From asset mix decisions to income withdrawal strategies, there are many factors to consider when converting from a retirement savings plan to a retirement income plan.
A CIBC advisor can help you determine the retirement income options that will best suit your retirement needs.