Why We Should Not Neglect Registered Retirement Income Funds
The number one piece of financial advice most Canadians hear is to buy a house and/or invest in RRSPs. But what often gets overlooked is the crucial step of managing that money once you reach retirement age. That’s where Registered Retirement Income Funds (RRIFs) come into play.
RRSPs End at Age 71
Let’s imagine you retire at age 65 after contributing to your RRSPs throughout your working life. What happens next?
You don’t need to make any immediate changes to your RRSP. If you’ve stopped working, you might not have the income to continue contributing, and you may need to start withdrawing from your savings to cover living expenses.
From age 65 to 71, withdrawals from your RRSP are optional. However, once you hit 71, you’re required to close your RRSP—that’s the rule. At this stage, it’s wise to start withdrawing from your Registered Retirement Income Fund as soon as you stop earning taxable income. By spreading out your withdrawals over time, you can manage your taxable income more effectively.
What Are Your Options?
There are two paths you can take—one bad and one better.
The bad option? Writing a cheque to yourself and depositing all your RRSP savings into your checking account. Doing this triggers a hefty tax bill, likely pushing you into the highest tax bracket. Any subsequent investments you make with that money will be subject to taxation on the gains—a double whammy. Don’t do this.
A better option is to roll all your savings into a Registered Retirement Income Fund (RRIF).
What is an RRIF?
An RRIF is essentially a continuation of your RRSP. Your money continues to grow tax-free, but there’s one significant difference—by age 71, you must start withdrawing funds, and by age 98, everything must be withdrawn.
The minimum withdrawal rate at age 71 is 5.28%, and it increases each year until it peaks at 20% by age 95. If you’re fortunate enough to reach 98, all the funds must be withdrawn by then. Generally, your financial institution will inform you of the minimum withdrawal amount each year.
Withdrawals in Kind
If you don’t need the cash for day-to-day expenses, you can opt for withdrawals in kind. For instance, if you own shares of the U.S. index and prefer not to sell them, you can transfer them to your TFSA or a non-registered account.
Remember, all withdrawals are taxable. You didn’t pay taxes when you contributed to your RRSP, and the government will eventually want its share.
Consider Estate Planning
If you don’t need the money for living expenses, now might be the time to start gifting some of it to your heirs or setting up a trust in their names.
The Old Age Security Clawback
Lastly, keep an eye on your taxable income. If it exceeds $74,788, you’ll begin to lose some of your Old Age Security (OAS) benefits. The higher your income above this threshold, the more OAS you’ll lose.
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