Address

BMO Nesbitt Burns
1 First Canadian Place
40th Floor , P.O. Box 150
Toronto, ON
M5X 1H3
Map

Contact Us

RRIFs and RRSP Maturity Options

Posted on: February 11, 2019

RRIFs and RRSP Maturity Options

An RRSP is designed to be a savings vehicle that is designed to create a cash flow for you during retirement, similar to a monthly pension from a pension plan. With an RRSP, you make annual contributions and receive a tax benefit as the contributions are made on a pre-tax basis. During the interim, the RRSP account grows on a tax deferred basis. Eventually, when the account is depleted in retirement, withdrawals from the account are taxable as pension income.
Your RRSP matures the year you turn 71 and the CRA requires that you select one of three options:
  1. Cash Withdrawal: Withdraw the entire RRSP as income.
  2. Life Annuity: Purchase a Registered Life Annuity to create a monthly income stream
  3. Convert to a Registered Retirement Income Fund (RRIF)
The most common option selected by investors is the RRIF conversion option. A RRIF is designed to provide an annual income stream to the account holder similar to the life annuity, but provides much more flexibility with regards to the amount and timing of the withdrawals, estate planning options and income splitting.

How RRIFs Work?

With a RRIF, you are mandated to withdraw a minimum amount from the account as income each year. This amount is based upon a given percentage based upon your age and the fair market value of the account at the beginning of the year.

This percentage gradually increases from 5.28% at age 71 to 20% at age 95. CRAs withdrawal percentages are designed to provide a balance between making the funds last for Canadian’s retirement and depleting the accounts over time.

Increased Flexibility

A RRIF provides for more flexibility than the Life Annuity option. While a Life Annuity provides a monthly income stream, it does not have any flexibility with regards to the cash flow. The cash flow that agreed upon at the conversion to the annuity is the cash flow that you will receive for the rest of your life. For example, if interest rates are low when you convert to the annuity, then you are locking in an income stream at those rates for the rest of your life.

With a RRIF, you have increased flexibility with receiving an income stream as you are only mandated to take a MINIMUM cash flow from the account. If you desire to take an income stream that is higher than the minimum, you are able to do so. This can be a great help if you are planning a large trip, house renovation, etc.

Secondly, with a RRIF, you are able to benefit from changing financial conditions. One strategy that we use with our RRIF accounts is purchasing companies that increase their dividends and a laddered bond portfolio. These strategies allow our clients to receive higher cash flow from increasing dividends from the bonds in their portfolio while also allowing their bonds to generate interest cash flow while navigating the yield curve to maximize income and risk protection.

While being able to invest can provide benefits, there is the possibility of down years of return. Retirement is a long term life event and as such your RRIF can withstand market volatility as cash flow is being generated by the account

Retirement Income Benefits

Another benefit of a RRIF is that you have the ability to do pension income splitting with your spouse. This can be extremely beneficial in retirement as it can lead to lower taxes payable to the CRA and have more cash available to you in retirement.

Another benefit of a RRIF is that you are able to use a younger spouse’s age for your RRIF withdrawal calculation. For example, if you are 81 and your spouse is 76, you would have a withdrawal rate of 5.98% instead of 7.08%. This can make a large difference with your taxes if you have other sources of income during retirement.

Estate Planning

With a RRIF, you have the option to designate a successor annuitant and beneficiaries for the account. This can be quite helpful when estate planning. With a successor annuitant, you are able to roll the RRIF account of the deceased to a surviving spouse without any tax consequences. This is quite beneficial as it allows for the value of your RRIF to be rolled over to your spouse to make sure that the income stream continues for your spouse’s lifetime.

With a RRIF, you are able to designate beneficiaries for your account. By designating beneficiaries for the account, you are able to ensure that the terminal value of your account passes to the designated beneficiaries outside of your will, bypassing probate and probate fees.

When the last surviving spouse passes away, the value of the account is taxable as income on the terminal tax return. One thing to consider with beneficiary designations is that the estate is responsible for the taxes payable on the terminal tax return, even if the funds are distributed to the beneficiaries directly. This could be a potential issue if the estate does not have enough funds to pay the taxes and should be considered when making any estate arrangements.

A RRIF is more flexible than a Life Annuity as it creates a guaranteed income stream for the surviving spouse and the potential to distribute capital to beneficiaries. With the Life Annuity option, there may or may not be provisions for the surviving spouse within the insurance contract and unless there is an insurance policy that is being paid for as well, there will be no capital available to given to a beneficiary as annuities are only designed to provide income for their specific term.

Conclusion

Out of all of the RRSP maturity options available to you, RRIFs are the most flexible option available to Canadian investors as they are able to create a flexible income stream in retirement with income splitting and estate planning benefits.

Sample RRIF Withdrawal


 
 

Next