Why we should not neglect Registered Retirement Income Funds

The number one financial advice given to most Canadians is to buy a house and/or to invest in  RRSPs.

One advice you heard less often is what to do once you have reached retirement age, how to invest or divest of all the money you have saved throughout your life. That’s when we should focus on Registered Retirement Income Funds.

RRSPs end at age 71

• Let’s take a scenario. You stop working at age 65.
• You have contributed to your RRSP all your life
• What do you do now?

You don’t have to make any changes to your RRSP right away. If you stop working then you may not have money to make any contributions, in fact, you may need to start withdrawing money from your savings to cover your living expenses.

At this stage, you can withdraw whatever amount you need to cover your cost of living, just remember that whatever amount of money you withdraw, it will be taxed right away. As soon as you make that withdrawal, the government will take its cut.

From age 65 to age 71, it is optional to withdraw money from your RRSP but age 71, you have to close your RRSP. That’s the rule.

We suggest to start withdrawing money from your Registered Retirement Income Fund as you start earning taxable income. The sooner you start, the more you can spread the withdrewal of your saving over a longer amount of time and thus reducing your taxable income.

What can you do?

There is a very bad option and a no-bad option.

The bad option is to make a check to yourself and deposit all that money into your checking account.

This is what will happen. You will pay a huge tax bill. Most likely you will be taxed at the highest tax bracket. Then, if you make any investment with that money, the gains from that investment will be taxable. Bad idea. Don’t do that.

A better option.

Roll all your savings into a Registered Retirement Income Fund (RRIF).

What is an RRIF (Registered Retirement Income Funds)?

For all practical purposes, it’s almost the same as an RRSP (Registered Retirement Savings Plan). Your money can continue growing tax-free. The only major difference is that by age 71 you have to start taking the money out and by age 98 everything has to be withdrawn.

The minimum (there is no maximum) you can withdraw changes every year at age 71 is 5.28% and the minimum increases gradually every year until you reach age 95 when it goes up to  20% per year, and by age 98 everything needs to be out. Generally, your financial institution will inform you of the minimum amount you should take out every year. Good luck if you make it to age 98.

Withdrawals in kind. If you don’t need the money for your day-to-day expenses you can withdraw in kind. Imagine that you own share of the US index and you don’t want to sell those shares, you can transfer them to your TFSA or a non-registered account.

Keep in mind that all this money is taxable. You didn’t pay taxes on this money when you put it inside your RRSP and sooner or later, the government has to get its share.

This falls into estate planning, but let’s say that you don’t need the money to pay for your living expenses. This would be the time to start gifting some of that money to your heirs or to build a trust in their names.

The Old Age Security clawback

One last thing to keep in mind. If your taxable income is more than $74,788 you will start losing your Old Age Security. The higher your taxable income is above $74,788, the more your OAS will be clawed back. If you earn $122,843 or more, you will lose 100% of your OAS.

Related articles

• Where to park my money: RRSP or TFSA?
• Most Canadians have an opportunity to become millionaires through RRSPs
• If you earn too much money, you could lose your Old Age Security (OAS)

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