Registered Retirement Savings Plans (RRSPs) are Canada’s most popular retirement savings vehicle for good reason. You get a tax deduction for the contributions you make, plus the amount saved which grows in a tax-sheltered account.
But in the end the government wants the tax to be paid. So, in the year you turn 71 an RRSP must be converted into a Registered Retirement Income Fund. (RRIF). Thereafter you must draw down the fund each year by amounts according to tables set out by Ottawa.
Any changes to withdrawal rates are made by Parliament. No changes have been legislated for 2022.
1. What is a RRIF?
A RRIF is a vehicle that allows Ottawa to get the tax refunds back. Unlike an RRSP which was designed to get Canadians to save for retirement, a RRIF is an income plan. It is a structured way to cash out your RRSP.
2. How does a RRIF work?
The amount you must withdraw increases each year after age 71 according to the tables. Your bank or investment advisor will have them. You can start earlier than 71, but not later.
The minimum withdrawals were relaxed in the 2015 federal budget to recognize that we’re living longer and rates of return on investments are lower than they were. In March 2020, then Finance Minister Bill Morneau reduced the minimum withdrawal rate by 25% for the year as a one-time response to COVID-19. In 2021 they reverted back.
3. A sample calculation
Suppose you were 71 on Jan. 1, 2021 and converted a $100,000 RRSP to a RRIF. You must withdraw 5.28% of the opening balance for the year as per the tables, or $5,280. Withdrawal rates rise each year until 95 when they peak at 20% a year.
Depending on your cash flow needs you can take out all the money on Jan. 1 or all on Dec. 31, or at any combination in between. You can also withdraw more than the minimum, but never less.
4. How do I set up a RRIF?
You can set up a RRIF through a bank, investment dealer, credit union, trust or insurance company. They will advise you on the types of RRIFs and the investments they can hold. Your advisor can help.
You can convert your RRSP as a lump sum, you can keep the same investments and sell them bit by bit, or you can convert your RRSP into an annuity that pays a monthly amount for life.
Each has a tax liability.
5. Can I have more than one RRIF?
Yes. You can have more than one RRIF and you can have self-directed RRIFs. You may want to set up a self-directed RRIF if you prefer to manage your investments yourself.
Once the RRIF is established, you cannot contribute any more too it. And the plan cannot be terminated except by death.
6. Is it only RRSPs that must be converted?
7. What can I hold in a RRIF?
There are no restrictions on the type of investment you can hold in a RRIF. You can keep the RRSP holdings as is and sell the appropriate amounts. You can hold any combination of stocks, bonds, GICs, mutual funds or Exchange Traded Funds (ETFs).
Each retiree must decide the right mix for their circumstances.
8. What happens to a RRIF when I die?
If you are the beneficiary of the deceased – often a spouse – the amounts received from a RRIF can be transferred to your RRSP, RRIF or PRPP.
How Harvest Portfolios can help?
Harvest Portfolios Group Inc. offers equity growth-focused and equity income Exchange Traded Funds (ETFs) that can be part of a retirement plan. The Harvest philosophy is to offer simple, transparent, fee competitive ETFs that own successful dividend-paying global businesses which grow over time.
Harvest offers 13 ETFs which are divided among eight equity income-oriented ETFs and five that are equity growth-focused. The equity growth-focused ETFs generally offer more opportunity for capital appreciation. They focus on emerging or mega investing themes which over time can generate powerful returns.
All Harvest ETFs are RRSP and RRIF eligible.
The Harvest covered call option strategy
Harvest is the third largest option writing firm in Canada with seven of its 13 ETF’s having option writing strategies. Harvest uses a covered call strategy to generate additional cash flow.
The strategy creates tax advantaged income where the tax advantage comes from the premium income created by the call writing. It is treated as capital gains.
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