Riff…? No, we’re talking about a RRIF
An Introduction to Registered Plans – Part 2
You’ve saved up all that money in your RRSP. Now what?
The Registered Retirement Savings Plans, intended to encourage saving for retirement, was introduced by the Government of Canada in 1957.
If you have saved inside an RRSP, eventually you will want to start withdrawing the funds in order to take care of your retirement spending needs.
An overview of options for withdrawing from an RRSP
While the RRSP is for retirement, you are not obligated to use your RRSP for that purpose. The government provides two plans that allow you to divert your retirement savings for other purposes without paying withholding tax:
- The Home Buyers’ Plan (HBP) is a program that lets you withdraw up to $35,000 (as of the 2019 budget, up from $25,000) from your RRSP to help you buy or build a home. If you qualify, together with a spouse you may be able to withdraw up to $70,000 from your RRSPs. Beginning two years after the year in which you withdraw the funds, you must begin to repay this money to your RRSP. Failing to do so will result in the missed annual repayment amount becoming taxable income.
- The Lifelong Learning Plan (LLP) permits you to withdraw from your RRSP to support the costs of full-time training or education for yourself or your spouse. You can withdraw up to $10,000 per year and $20,000 in total to help with your costs. Both you and your spouse may be able to participate so potentially you could withdraw up to $40,000. Repayment to your RRSP is mandatory to avoid taxation. You have up to 10 years to repay.
You may make withdrawals from your RRSP. You may do so on an as-needed basis rather than withdrawing it all at once. Withdrawals from an RRSP attract mandatory withholding tax as follows, which your financial institution (FI) must remit to the Canada Revenue Agency (CRA):
|Range ($)||Withholding Tax (%)*|
|$0 – $5,000||10%|
|$5,000.01 – $15,000||20%|
|$15,000.01 and greater||30%|
*For all areas of Canada outside of Quebec.
Some people try to outsmart the FI by making several withdrawals not exceeding $5,000 each time. If you make $5,000 withdrawals frequently enough, your FI may aggregate those withdrawals and require you to pay a higher withholding tax rate.
In the year you turn 71 you must decide what to do with your RRSP. You have the option of withdrawing it entirely. Tax will be withheld by your FI according to the schedule described above. This is usually not the best choice, however, because a large withdrawal will attract more tax than if smaller amounts were withdrawn over your lifetime.
Purchase an annuity
An annuity is a product purchased from insurance companies that provides the “annuitant” with a steady stream of income. An annuity can be described as a way to “pensionize your nest egg.”† That is, it turns the unsteady returns of your RRSP into a pension, steady payments that your insurance company is obligated to pay to you on a monthly basis. Tax is partially deferred as you only pay income on the amount that is paid out.
There is a downside to annuities. You give over a large sum of money to an insurance company in exchange for an indefinite number of payments. You give up control of your money, and depending on the type of annuity, you may lose it all if you die sooner than anticipated. Even with these challenges, annuities have one major advantage over retaining control of your funds – you have addressed the risk of outliving your money.
Using a Registered Retirement Income Fund (RRIF)
Probably the most common choice is to roll your RRSP into a RRIF (pronounced riff). A RRIF is the registered plan that is used to draw down the accumulated funds in your RRSP to support you in your retirement years.
The RRIF is popular because you retain control of your investments and, as long as you meet your annual minimum payments, you can withdraw whatever amount you wish.‡ Furthermore, your FI is only obligated to withhold tax on the amounts withdrawn above the minimum.
You must convert your RRSP to a RRIF not later than the year you turn 71 and begin to take payments from your RRIF the following year. If you wish, however, you may want to start sooner and take larger amounts so that you can delay receiving CPP, and possibly OAS. This is a decision that is better made in consultation with a financial planner.
You can see that when an RRSP can no longer be used, there are certain limitations on how the accumulated funds can be withdrawn. There is another registered plan, though, which knows no such restrictions, the TFSA.
†Not coincidentally, Pensionize Your Nest Egg is the name of an important book on the topic by Moshe Milevsky and Alexandra Macqueen.
‡There are locked-in plans, which typically represent funds transferred from a Registered Pension Plan, for which a maximum withdrawal amount is also set, but that is beyond the scope of this post.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.