RRSPs have two major advantages:
• Tax-deferred contributions.
• Tax-sheltered growth.
1. "What is a RRIF and how exactly does it work?"
A RRIF is one of the options you can choose from when you convert your RRSP to start drawing retirement income.
A RRIF provides you with a regular stream of income, subject to a minimum annual withdrawal amount.
The money you transfer to your RRIF continues to grow tax-sheltered until withdrawn as income.
RRIFs are the most flexible of the retirement income options, since you maintain complete control over your savings.
Here's how a RRIF works:
1. First, the Company will help you calculate the minimum RRIF payment you must take each year. Then determine if it meets your annual income requirements.
2. If it does, choose the minimum payment amount. If it doesn't, identify sources of pension and other income you might have access to, or consider withdrawing a larger amount from your RRIF.
3. Determine the payment frequency that best meets your needs - whether monthly, quarterly or annually - and choose the investments you'll want to have your income payments taken from.
4. Pay tax only on the actual amount of RRIF income received each year (in combination with your other taxable income).
5. The balance of your RRIF should remain invested, allowing it to continue growing tax-free until you withdraw it as income.
2. "Must I be a certain age to purchase a RRIF?"
You can use your RRSP funds to purchase a RRIF any time you want, but remember that you must transfer all your RRSP savings into a retirement income option by December 31 of the year in which you turn 71.
And, you may purchase a RRIF at any time - regardless of your age - with funds transferred from another RRIF, or with funds taken from an annuity originally purchased with RRSP assets.
3. "How much can I withdraw from my RRIF each year? Are there restrictions?"
You must withdraw at least the minimum amount each year as prescribed by law - except in the year your plan is set up.
While there are no restrictions on the maximum amount you may withdraw annually, selecting the minimum annual payment amount ensures that your funds last throughout your lifetime.
You can make additional RRIF withdrawals over and above your selected payments at any time, realizing that, in doing so, your funds may not last as long as you need them.
4. "How is the minimum annual payment calculated? How much will my minimum be?"
SYour minimum annual RRIF payment is calculated as a percentage of the total value of your plan on January 1 each year.
The factors - which are set by the Income Tax Act (Canada) - are based on your age (or on the age of your spouse if so designated when you set up your RRIF).
You then invest the money in an equity Segregated (mutual) fund. Suppose your money is 100% in stocks, and you earn a 10% pre-tax profit, all of which is in capital gains. Capital gains are taxed at half your marginal tax rate, or 25%. Assume you sold your investment a year after you bought it, you would lose a quarter of your profits. This means that you really only made an after-tax return of 7.5%. If you continue to buy and sell investments in each year for 20 years, the original $2,500 investment would be worth almost $11,000.
5. "When must I take my first annual RRIF income payment?"
By law, you must begin withdrawing RRIF payments no later than the end of the year following the one in which your plan was opened.
If, for example, you purchase your RRIF in 2000, you are obliged to take your first payment by December 31, 2001.
If you take the money out of your plan, it's taxed. But even assuming it's all taxed at the 50% marginal tax bracket, it would still be worth almo
6. "What about taxation?"
RRIF payments are taxable in the year they are received. Your total annual RRIF income is added to your other taxable income and you are taxed accordingly.
Withholding tax is not deducted from minimum RRIF payments - it is your responsibility to ensure you have budgeted for it come tax-time!
Withholding tax is deducted from any amount in excess of your minimum payment amount, so be sure to factor that into your calculations when determining how much to withdraw.
If you prefer, you may ask your plan provider to have income tax withheld from your regular income payments.
RRIF withdrawals that exceed your yearly minimum are subject to the following withholding tax rates:
Amount of RRIF
Other provinces or territories
Province of Quebec
Less than $5,000
$5,000 - $15,000
$15,000 and more
The actual amount of income tax paid at year-end will be based on your income from all sources.
7. "What are the special taxation issues associated with a spousal RRIF?"
A spousal RRIF is a RRIF that has been created with spousal RRSP, that is from an RRSP that has been created by an individual in his or her spouse's name. Withdrawal of an amount in excess of the yearly minimum from a spousal RRIF may be taxable for the contributor if a contribution was made to the spousal RRSP during the year in which the excess amount was withdrawn, or in the two years prior to the withdrawal.
8. "Is there any way to preserve the tax-favored status of my RRIF for my beneficiaries?"
Absolutely! As one of the key advantages associated with a RRIF, consider the tax consequences of naming:
• Your spouse as beneficiary
• Dependent children/grandchildren as beneficiaries
• Other parties as beneficiaries
Your Spouse as Beneficiary
If you name your spouse as successor annuitant, your RRIF will continue to make minimum amount payments to your spouse who will automatically 'step into your shoes' as the new annuitant.
If you name your spouse as beneficiary, he or she can:
• Transfer funds to another RRIF, or purchase an annuity in his or her name with new terms and payments
• Roll the remaining RRIF assets into an RRSP in his or her name (if younger than 71)
• Collapse the plan and take the proceeds into income, paying the required tax
The RRIF funds will retain their tax-sheltered status in all but the last case.
• Segregated (not mutual funds) funds have many advantages.
• Probate Bypass. When your Children are named as beneficiaries.
• Base Guarantee of 75% of principal, up to 100%
• Death Benefit guarantee of principal.
• Creditor Protection.
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