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Drawing income in retirement

Retirement can provide a great opportunity to travel, spend more time with family and focus on things you’ve always dreamed of doing but didn’t have the time for. To help fund your retirement years, you may have been contributing to a registered retirement savings plan (RRSP) during your working years.

If you have, you will need to convert your RRSP to a retirement income option when it’s time to fund your retirement. Technically, you could collapse your RRSP and take the cash but this would create an immediate tax liability on the full value of the RRSP. Therefore, a RRIF – or an annuity, or a combination of both – is popular for its tax advantages. Let’s focus on RRIFs.

Whereas RRSPs help you accumulate assets for retirement, RRIFs are designed to provide you with a steady stream of income when you are in, or near, retirement. RRIFs offer several compelling benefits:

  • Tax-deferred growth. Although your RRIF withdrawals are taxable, the investments inside your RRIF continue to grow tax-deferred.
  • Variety of investment options. Any investments that you have in your RRSP can also be held in your RRIF. These include mutual funds, stocks, bonds, guaranteed investment certificates (GICs) and cash.
  • Flexible withdrawals. Although there is a minimum RRIF withdrawal that you must make every year, there is no maximum limit.
  • RRIFs are transferrable to a spouse/common-law partner. In the event of your death, your RRIF can be transferred directly to your spouse or common-law partner, tax free.
RRIF fundamentals

It is important to keep up to date on the rules governing RRIFs, as they are subject to change with every federal budget. The following fundamentals were updated as of 2016.

You must convert your RRSP into a RRIF by the end of the year in which you turn 71; however, you can transfer your RRSP assets into a RRIF at any time before that if you wish. Since RRIFs are designed to generate an income, you must begin taking an annual minimum withdrawal the calendar year after you set up your RRIF.

Annual minimum withdrawals

Your annual minimum withdrawals are calculated using your (or your spouse’s) age. Investors often use their spouse’s age to calculate their RRIF payments if their spouse is younger. By using a lower age, you can reduce the size of your minimum withdrawal, assuming you can manage financially with smaller withdrawals. It will also allow you to reduce the tax hit and extend the life of your RRIF.

Your age (at beginning of calendar year) Withdrawal amount (% of RRIF market value)
Younger than 71 Formula is 1 / (90 – your age)
71 5.28%
72 5.40%
73 5.53%
74 5.67%
75 5.82%
76 5.98%
77 6.17%
78 6.36%
79 6.58%
80 6.82%
81 7.08%
82 7.38%
83 7.71%
84 8.08%
85 8.51%
86 8.99%
87 9.55%
88 10.21%
89 10.99%
90 11.92%
91 13.06%
92 14.49%
93 16.34%
94 18.79%
95 or older 20.00%

Whether or not you decide to take more than your annual minimum withdrawal will likely depend on if you have other sources of income (e.g., pension, non-registered investments or part-time job) and your cash flow needs at the time. RRIFs have flexible payouts, so you can change your withdrawals to match your needs without incurring any penalties.

RRIFs will likely play a key role in your retirement, so it is important to work with your financial advisor in order to plan when you will transfer assets over from an RRSP, how much income you will require in retirement and what investments you should be using to achieve your retirement goals.

The contents of this piece are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.

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