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Investment Basics

RRIF - Registered Retirement Income Funds

If you hold an RSP, you face a major decision in the year you turn 71 - what to do with your money.

There are basically three choices:

  1. Cash in your RSP and claim it all as taxable income
  2. Buy an annuity
  3. Transfer your RSP to a Registered Retirement Income Fund (RRIF)
The first choice generates a hefty tax bill and eliminates many of the advantages of having an RSP in the first place. Buying an annuity gives you the security of guaranteed payments for a fixed term, or for life, but you lose control over how your money is invested, and your payments are not normally indexed for inflation. Your most attractive option may be a RRIF.

You don't have to be a blues guitarist to understand RRIFs and use them to your advantage.

You can buy RRIFs as GIC-type investments, although many people increasingly choose mutual funds or even self-directed RRIFs that let you hold mutual funds, stocks, bonds, and mortgages. A self-directed RRIF carries an annual administration fee ranging from $100-$300, so the size and performance must be high enough to justify the increased costs.

You must make a minimum annual withdrawal from a RRIF which is added to your taxable income. This minimum withdrawal begins at 5.26% of your RIFF's value at age 71 and increases to 20% at age 94 and beyond. Bear in mind that if your RRIF earns less than 5.26%, you are eating into your capital right away.

When a RRIF holder dies, the money in the plan is tax deferred if the beneficiary is a spouse or a dependent child or dependent grandchild.

RRIFs are offered by most financial institutions: mutual fund companies, investment dealers, banks, trust companies, life insurers, and credit unions. If you buy a RRIF from any institution other than where you have your RSP, the transfer can take weeks, so you don't want to delay. Your RRIF must be established by December 31 of the year in which you turn 71.

However, it pays to shop around. Here are a few points to consider:

  • Flexibility
    Is it possible to change your plan, and are there additional fees or market value adjustments?

  • Protection
    For GIC-type RRIFs, make sure the principal plus accrued interest is within the limits set by Canada Deposit Insurance Corporation or Comp-Corp for the insurance industry or your credit union plan. If not, divide your money among issuers because you can have more than one RRIF.

  • Security of Issuer
    If your RRIF institution fails, others may step in and honour previous commitments, but it's not guaranteed. In the meantime, your contracted withdrawals will continue, but your capital will be frozen.

  • Rates
    Calculate the actual payments after all fees. If you withdraw less than your RRIF earns in the year, does the balance earn interest at your regular rate or less? The best test is to ask several RRIF issuers for a printout based on the same hypothetical initial balance and constant withdrawal each December 31 for ten years. After factoring in all fees, the account with the highest balance has the best rate and terms of accrual.

  • Frequent Payments
    To even your cash flow, you may wish to take payments more frequently than once a year. Is there an additional cost or reduced interest rate for this option and can the RRIF issuer directly transfer funds to your bank account?
These are the basic points you will want to discuss with your financial adviser when considering the best RRIF for you. With the proper RRIF advice, you won't be singing the blues.

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