Dubunking the Registered Retirement Savings Fund (RRIF)

Dubunking the Registered Retirement Savings Fund (RRIF)

Registered Retirement Savings Plans, also known as  RRIFs are a popular choice for clients with maturing Registered Retirement Savings Plans (RRSPs).  RRIFs can start at any age but must do so no later than the end of the year in which the taxpayer reaches age 71.  So much for the basics. Here are some examples of how they can be used:

Blake is now 68 and married.  He has decided he needs more income to maintain his chosen lifestyle and so is looking to withdraw money from some un-matured RRSPs.  He has three choices – take lump sum withdrawals (which of course are taxable), buy an Annuity (fixed, taxable monthly payments for the rest of his life) or purchase a RRIF (flexible, taxable payments for as long as the funds last).

Lump sums are a possibility but they don’t qualify for any pension tax credits and can only be made up to Blake’s age 71 when he has to make a final choice regarding the RRSPs.  The annuity option probably isn’t the best choice at this time for Blake as there is no flexibility in the payments – they are fixed, arrive on a monthly basis and last for life.  A RRIF seems to offer Blake the best of all worlds – flexible payments that are still taxable but the payments are eligible for all of the pension tax credits and pension income sharing when he does his tax return each year.

RRIF holders must take a minimum amount of money each year and it is based on a formula of percentages that are published regularly by the Ministry of Finance through the Canada Revenue Agency (CRA).  The minimums are determined on January 1st of each year however the taxpayer can take out more than the minimum at any time.  From Blake’s perspective, the RRIF option makes more sense since he wants income (so the minimum requirements are not an issue) and wants to take more money to spend on a random basis for his chosen lifestyle.

Another taxpayer, Rose is married – she is 71 while her husband is only 62.  RRIF minimums are based on the age of the taxpayer however there is a choice of whose age to use.  In most instances, the age of the younger spouse is used because the minimums are smaller.  While her husband Ron is going to be considered as the “measuring life”, the income is still Rose’s and is taxable in her hands.

Some important Income Tax information.  All payments from RRIFs are taxable.  Minimum payments are not subject to mandatory withholding of tax however it is a good idea to have tax remittances set up with the issuing institution so you don’t get a big surprise come April 30th of each year.  As the lowest combined Federal and Provincial/Territorial tax rate is 20%, this is a good starting place for your calculations.  Additional payments above the minimum amount will be subject to a withholding tax that ranges from 10 to 30% (outside Quebec) depending on the amounts withdrawn.

Would you benefit from assistance in planning your retirement income?

Mutual funds and/or approved exempt market products are offered through Investia Financial Services Inc. 

Insurance products are provided through multiple insurance carriers.

Tax Free Savings Accounts (TFSAs) – A Starter

Tax Free Savings Accounts (TFSAs) – A Starter

Mei has heard about Tax-Free Savings accounts but is still not sure they are the best alternative for her investments.  TFSAs are the newest incentive from the Federal Government (with follow-on support from all Provinces and Territories) to taxpayers to save for their futures.

Born out of the financial crisis of 2008, the TFSA was introduced in 2009 as a means to encourage average Canadians to get money out of savings accounts and back into the stock market while accumulating funds for whatever purpose the taxpayer desired, unlike Registered Retirement Savings Plans (RRSPs) which are directly focused on accumulating funds for retirement.  Mei understands RRSPs but is wondering if the TFSA is a better alternative.  The short answer is that neither is better than the other – they are different but have some similarities.

Unlike RRSPs, the TFSA maximum contribution limits are the same for every eligible taxpayer.  The annual limit for 2017 is $5,500 for contributions to a TFSA while the cumulative limit exceeds $50,000.  The TFSA is designed to accept pre-tax contributions – in other words, Mei cannot deduct her TFSA contribution from her income when doing her tax return, unlike her RRSP contributions which are tax deductible.  To better illustrate this, if Mei is in a 28.2% Tax Bracket ($52,500 of taxable income for 2016) she has to earn $1,393, pay tax of $393 and have $1,000 left to contribute – pre-tax dollars.

Where the 2 plans are similar is that the growth (investment returns) on the funds inside the plan are sheltered from tax – no T-5 slips or T-3 slips are issued for gains.  For example, if Mei was earning 6.00% rate of return on her TFSA investments, she earns the full 6.00% however if she held those same investments in a non-RRSP, non-TFSA account, she would only keep 4.31% after taxes of 28.2% are subtracted.

Withdrawals are different for each plan.  If Mei takes any money out of her RRSP, Canada Revenue Agency (CRA) will tax every dollar.  However, money withdrawn from a TFSA is not taxed – not the original capital nor the growth or increase in value.

 

Let’s compare                                                             RRSPs                                      TFSAs

 

Deductible contributions                                              Yes                                           No

 

Tax Sheltered Growth                                                   Yes                                           Yes

 

Taxable withdrawals                                                      Yes                                           No

For investment choices, Mei can select from any of the following for her TFSA:  Guaranteed Investment Certificates (GICs), Index or Market Linked GICs, Guaranteed Investment Accounts, Segregated Funds, Mutual Funds, Stocks, Bonds or Exchange Traded Funds (ETFs).

Would you benefit from a discussion about TFSAs?

 

Mutual funds and/or approved exempt market products are offered through Investia Financial Services Inc. 

Insurance products are provided through multiple insurance carriers.