We hear a lot about TFSAs and RRSPs, but how much do you know about RRIFs? An RRIF is a Registered Retirement Income Fund, similar to a TFSA or RRSP, and Canadian Tax Law defines it as a tax-deferred retirement plan. It’s registered under the Canadian Revenue Agency (CRA) and is a method used by individuals to continue growing their retirement savings while deferring the taxation of those savings.
How to Open an RRIF
You can open an RRIF at any time before the end of your 71st birthday year by converting an RRSP into an RRIF. At the end of that year, it’s mandatory to convert your RRSP or withdraw the savings altogether. If you do choose to make one substantial withdrawal, though, it could mean massive taxation on the amount saved. By converting your savings into an RRIF, you continue to grow the amount while deferring taxation. Although you must close an RRSP or convert it into an RRIF before age 71, you can open an RRIF any time before that.
An investment advisor can help you decide which type of RRIF is best for you, but here’s a fun fact: you can have as many RRIFs as you’d like.
What’s the Catch?
There is an RRIF minimum withdrawal that you must make each year depending on your age. The amount is taxed, but if your spouse or common-law partner is younger than you, you can use their age to calculate a lower yearly minimum. There’s no maximum amount, though, so if a large life expense comes up, the funds are available to you.
What Happens to an RRIF When You Pass On
You can choose a beneficiary for your RRIF and the remaining amount within it upon your death. When the time comes, the taxes required will depend on who your beneficiary is and if you’ve even named one. If you don’t, the amount in the RRIF will be used towards the probate fees on your estate and will be included in your final income tax return. However, if you do, the amount remaining in the RRIF won’t be used for income taxes or probate as long as your beneficiary is a spouse, a financially dependent child or grandchild under 18. or a child or grandchild with a disability. The moral of the story? Name a beneficiary.
Growth within an RRIF
As with an RRSP, an RRIF allows you to continue growing your retirement savings through investments. Similarly, you can have more investment flexibility, allowing you to look at alternative investments. Many people like RRIF accounts due to this similarity to RRSPs and the control they continue to have over their investments. RRIF accounts let you hold a variety of assets, thus diversifying your portfolio effectively.
A Mortgage Pool managed by a Mortgage Investment Corporation is a viable alternative investment for diversifying your RRIF. This is an especially attractive option due to the tax deferral characteristic of an RRIF and that MICs aren’t generally subject to tax. So long as the investments in the MIC aren’t “prohibited investments,” as described under the Canadian Income Tax Act, there’ll be no penalty tax.
If you’re considering turning a portion of your savings over to an RRIF and want to know more about diversifying the investment with a mortgage investment, we’d love to talk to you. Get in touch with Jordan on our team today.