What you need to know about RRIFs

December 14, 2020

Most Canadians know the ins and outs of a Registered Retirement Savings Plan (RRSP), but fewer can tell you what happens to an RRSP when you turn 71.

That’s because most of us are more interested in what the government gives us in the spring in the form of a tax refund for an RRSP contribution. That’s an easier focus than what it’s going to take away decades later in taxes.

But all good things come to an end and the tax deferred in an RRSP starts coming due a few years into retirement when you are forced to cash it in.

What is a RRIF?

By the end of the year in which you turn 71, you must convert your RRSP into a Registered Retirement Income Fund (RRIF), a vehicle that allows Ottawa to get those tax refunds back. Unlike an RRSP which is a savings plan, a RRIF is an income plan. It is a structured way to cash out your RRSP.  It is the most popular and simple way Canadians turn their RRSPs into income streams.

How does a RRIF work?

In March 2020, Finance Minister Bill Morneau said the federal government would reduce the minimum withdrawal rate for registered retirement income funds (RRIFs) by 25% for the year. The measure was part of the government’s COVID-19 relief package.

For example, if you were 71 as of Jan. 1, 2020, you would only need to withdraw 3.96 per cent of the opening balance, rather than 5.28 per cent, the normal rate. The lower minimum withdrawal also applies to Life Income Funds (LIFs) and other locked-in RRIFs. If the amount withdrawn was more than the temporarily lowered minimum amount in 2020, unfortunately, you can’t recontribute any excess back to your RRIF.

The minimum withdrawals  for RRIFs were relaxed in the 2015 federal budget. The changes recognized that we’re living longer and rates of return on investments are much lower than they were. You want to have enough money to live on, but not to outlive your savings. The changes reduced the required amount of withdrawals each year.

Although the required withdrawal amounts changed, the basic rules stayed the same. You can take the money out of 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.

If you choose the second or third option, there are strict requirements about how much you have to take out of your RRIF each year.

Suppose a retiree has converted his or her RRSP to a RRIF and is 71 this year. The minimum withdrawal in 2020 is 3.96% for this year only.  (You can always withdraw more, but not less.) If you have $100,000 in the RRSP, in the first year $3,960 comes out, leaving a balance of $96,040 at the end of the year.

In Year 2, the withdrawal rate goes up to 5.40% of the balance, so $5,186 comes out, leaving balance of $90,854. And so on.

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).

The question for investors, is how to find the right mix for their circumstances.

As interest rates fall, they are looking for ways to improve their income streams. A decade ago, if you had $1 million and put it into GICs, you might have seen a 4% to 5% yield, or $40,000 to $50,000 a year. The best one-year GICs are yielding about 1.3% or $13,000, with the best rates at chartered banks about half that. So, the income has declined considerably.  Unless investors adopt a different strategy, they are faced with drawing down their capital.

How Harvest Portfolios Group can help?

Harvest Portfolios Group Inc. was founded in 2009 by Michael Kovacs who believes the best recipe for investing success is through ownership of the biggest global players, with deep pockets, strong businesses, consistent dividend flows and opportunities for growth.

This is the core of the Harvest ETF philosophy. Harvest uses a quantitative and fundamental analysis process to select and manage its ETF portfolios. The ETF investment mandates are transparent and simple for clients to understand.

Harvest chooses global leaders, or the biggest and most dominant companies in their industry. They have financial staying power and a history of profitability and rising dividends. These features mean the companies protect investor capital while providing growth.

The Harvest quantitative model selects companies with a long history of success. They dominate their industries, they innovate, they evolve, and their consistent performance is measured by a long record of rising sales and profits.

All Harvest funds are RRSP and RRIF eligible.

The Harvest covered call option strategy

Harvest enriches its ETFs returns with a covered call strategy that adds to the basic return. Harvest is second largest option writing firm in Canada with most of its income ETF’s having option writing strategies. Harvest has made it a specialty focus in managing its income ETFs.

The strategy creates tax advantaged income through an active covered call writing process.  The tax advantage comes from the premium income created by the call writing. It is treated as capital gains.

The Harvest Advantage

Harvest offers a diversified portfolio of investment products that are:

  • Globally diversified by sector and region;
  • Hold consistent dividend paying companies with high recurring revenues;
  • Utilizes an active covered call strategy which generates an attractive tax efficient distribution stream.

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