By Adrian Mastracci, KCM Wealth Management
Special to the Financial Independence Hub
“Be very mindful of your RRIF. Understand its purpose. Then review it periodically to make sure it’s on track to deliver.”
It’s time to start paying special attention to RRIFs.
Even if you don’t yet need one.
RRIFs (Registered Retirement Income Funds) are income withdrawal plans, while RRSPs are savings plans.
No deposits are allowed to be made into a RRIF after the RRSP conversion.
The venerable RRIF remains firmly entrenched as a prominent retirement planning vehicle.
It has become an essential foundation of many a retirement nest egg.
Starting a RRIF at age 71 implies long-term planning, say to age 90 and beyond, especially if there is a younger spouse.
That’s one very good reason to be aware of the details.
Two major changes were proposed in the recent Federal Budget, starting in 2015:
- Minimum RRIF draws are reduced for ages 71 to 94 (See highlighted figures in table below).
- Re-deposit of the difference in draws is allowed by Feb 2016.
KCM’s RRIF philosophy
- Our preferred strategy is to integrate the RRIF into the overall investment roadmap. A diversified plan with the appropriate asset mix and tolerance for risk. Become familiar with the taxation of investment income. Some investments, like equities, may make more sense outside RRIFs as the dividend tax credit is lost.
- Many investors focus on capital preservation and sustaining retirement income streams. Particularly, professionals and self-employed who don’t have employer pensions. A RRIF becomes a far more important planning tool for these groups.
- Eligible investments for the RRIF are the same as with the RRSP. Hence, investment strategy need not change if it accommodates the periodic RRIF withdrawals. Investors who require income from the RRSP are better off not converting the RRSP until age 71. RRSP withdrawals can be made as and when required until age 71.
- Investors may own more than one RRIF. Designate the appropriate beneficiary for each plan, such as the spouse and children. Upon death, RRIF accounts can be passed onto the surviving spouse. Ultimately, estate values can be preserved for beneficiaries named in the will.
- RRSP conversion choices include the venerable RRIF, cashing out the RRSP and a variety of annuities. The RRIF is most popular because it provides considerable flexibility. Further, RRIF income qualifies for the $2,000 pension income credit and pension splitting provisions.
- Converting the RRSP is mandatory for those who turn age 71 in 2015. Conversions must be finalized by December 31, 2015. All RRSP contributions can also be made by December 31st, unless there is a younger spouse.
- Minimum RRIF withdrawals are governed by a formula set as per the table below. RRIF withdrawals commence in 2016 for those who convert the RRSP in 2015. There is an election to receive the minimum RRIF payments based on the age of the younger spouse. Every RRIF withdrawal is taxable as regular income.
- Voluntary RRIF withdrawals, in excess of minimums, can be made any time. However, if the RRIF resulted from the conversion of a spousal RRSP, the three-year attribution rule still applies to RRIF withdrawals that exceed the minimums. Also review whether creating 2015 RRIF income is beneficial for those age 70 and under.
- One key advantage offered by RRIFs is significant flexibility. Each investor situation can be customized, year by year. Investors can choose the amounts withdrawn above the minimums, the frequency of withdrawals and the investments. Three things that make the RRIF so flexible.
- The vital question is still what’s important about the RRIF vis-a-vis the total game plan. That perspective guides the path that makes sense for the individual situation. Be careful of the investment risks incurred within the RRIF. Losses cannot be offset against gains. Receiving RRIF payments at year end allows greater investment income growth in the RRIF.
Stickhandling the RRIF path is important for both retirement and investment planning.
Paying special attention to RRIF details, vis-a-vis one’s goals, is a valuable exercise.
Adrian Mastracci, MBA, is president and portfolio manager for Vancouver-based KCM Wealth Management Inc., specializing in designing and stewarding retirement portfolios.
2015 RRIF Withdrawal Minimums
|Your Age||Former Minimum Withdrawal Rate||New Minimum Withdrawal Rate*|