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RRIF Basics — Winding Down an RRSP & Retirement Income Planning

15 November 2023

Research from Statistics Canada and the Bank of Montreal confirms that Canadians are prioritizing retirement savings. But what happens when it’s time to start winding down our investments post-retirement? As it turns out, investors are less certain about how to optimize their income and distributions once they stop working. That’s where a Registered Retirement Income Fund (RRIF) comes into play. 

RRIF: The Basics

A RRIF is an investment account that enables retirees to draw income from their retirement savings, including their Registered Retirement Savings Plan (RRSP). RRIFs are a key tool for retirement income planning and are intended to help retirees transition from saving for retirement to spending their retirement resources once they stop working. In this way, a RRIF acts as a retirement income fund. 

A RRIF must be opened before December 31 in the year the investor turns 71, and can only be funded by transferring assets from another registered investment plan, such as an RRSP or Spousal Registered Retirement Savings Plan. Although RRIF accounts can be opened any time, many people wait until they’ve retired or their RRSP reaches maturity before opening one. This is because you have to make a minimum withdrawal every year, beginning the the year after the RRIF is set up, and this has tax implications

One of the primary benefits of an RRIF is that assets transferred into the account can continue to appreciate in value and receive dividend and interest payments — without immediate tax consequences. As Edward Jones explains, a RRIF basically allows an RRSP to continue past maturity, leaving the investor to decide when to start the withdrawal process. 

RRIF accounts can accommodate various assets, including government and corporate bonds, Guaranteed Investment Certificates, exchange-traded funds, mutual funds, stocks, managed investment programs, and mortgage investments. In other words, these assets can be transferred into your RRIF account and continue growing in a tax-deferred manner until you decide to cash out or begin taking a retirement income. 

As National Bank explains, RRIF accounts have minimum withdrawal requirements that increase as you get older. You calculate this amount by multiplying the market value of the assets held in the RRIF at the start of the year by a prescribed factor.

For investors 70 or under, the minimum annual withdrawals are based on a prescribed factor calculated using the following methodology:

  • 90 minus the investor’s current age
  • Divide the number 1 by the number from the above calculation

The Canadian government sets minimum withdrawal rates for investors aged 71 or older.

Once retirees withdraw the minimum amount, they can take out as much as they want without limits. However, payments are subject to withholding taxes once they exceed the minimum set by the government. All withdrawals are taxed as income with the investor’s marginal tax rate applied. 

RRIF: Beyond the Basics

Rules governing RRIFs are slightly more complicated when spouses or common-law partners are involved. Investors who wish to keep money in their RRIF as long as possible can choose their partner’s date of birth to begin receiving payments, so long as they are younger. However, this decision is irrevocable – the date of birth you choose will remain intact for the life of your RRIF. 

RRIF withdrawal guidelines get more complicated when dealing with attribution rules, which are guidelines that determine who is considered the fund’s owner for tax purposes. Edward Jones explains, “if the beneficial owner of a spousal RRSP or spousal RRIF makes a withdrawal from the account and there was a contribution to the account in that year or the two preceding years, the withdrawal must be attributed back to the contributor.” This rule is only relevant if the RRIF withdrawal exceeds the mandatory minimum or if the withdrawal was initiated the same year that the RRIF was opened. 

RRIF accounts also have rollback options that allow the investor to transfer contributions back to their RRSP if they don’t need the income—provided the account holder is younger than 71. However, even under this scenario, RRIF account holders are still required to withdraw the minimum amount of income for that year.

Investors have the option of naming their spouse or common-law partner as a beneficiary of their account, allowing them to transfer their RRIF directly to them upon death. The transfer has no tax penalty so long as your RRIF is transferred to your partner’s eligible RRSP, RRIF, or annuity account. Dependent children and children with disabilities can also receive your RRIF tax-free in their RRSP accounts. 

Deciding when to convert your RRSP into an RRIF is an important decision, but there’s no one-size-fits-all strategy. Some experts have pushed back against the conventional wisdom that investors should wait until they’re 71 to convert to an RRIF for tax reasons. 

“It’s counter to the traditional advice, which is always to tax defer as much as you can,” Chris Ferris, CFP at Ryan Lamontagne Inc. in Ottawa, told The Globe and Mail. “But sometimes it makes sense to pay taxes earlier if you’re going to pay less of them.”

“You can take advantage of early retirement and withdraw any amount from your RRIF voluntarily,” he said. “This makes the minimum withdrawals later on smaller than they would be otherwise.”

Mortgage investments as an option in retirement income planning

A recent survey conducted by CPP Investments found that 62% of Canadians fear running out of money during retirement. More than one-half (53%) of respondents don’t know how much money they need to retire. These are, by far, the biggest pain points affecting retirement planners. 

In addition to managing expenses, sophisticated investors opt for a combination of income-producing and growth investments to grow their retirement nest eggs. For nearly two decades, mortgage investing has proven to be one of the most lucrative income-producing opportunities for investors planning for or nearing retirement. 

Mortgages are alternative assets that provide direct exposure to residential real estate markets across Canada. Mortgage investing is not real estate investing. Mortgage investors don’t buy physical real estate and don’t assume the risks of homeownership, title transfer, overhead costs, or potential liquidity constraints. Instead, mortgages are a real estate-backed investment. When you invest in mortgages, you become a private lender offering accessible financing solutions to borrowers needing primarily first and second mortgages. In exchange for lending your capital, you receive interest payments and fees from the borrower. This entire process is facilitated by a non-bank financial institution with experience originating and managing a portfolio of mortgages. 

Historically, mortgage investing has provided much higher rates of return than traditional fixed-income portfolios comprised of government and corporate bonds and Guaranteed Investment Certificates. Leading mortgage investment programs target annual returns of between 6% and 16%. These attractive yields can be compounded by continually investing in mortgage securities as you plan for retirement so that you can generate multiple income streams once you decide to retire. Mortgages are also RRSP and RRIF-eligible, meaning you can grow your mortgage investing portfolio in a tax-deferred way and transfer the assets to an RRIF. Mortgages also have the benefit of providing ballast to a portfolio since they are not correlated with public markets.

While Mortgage Investment Corporations (MICs) provide the easiest access to mortgage investing, there are arguably more lucrative options in the whole mortgage investment space. Whole mortgage investment programs are specifically tailored to the investor’s risk/return profile and long-term investment goals. To be eligible for these programs, investors generally need to invest at least $500,000 in liquid capital, plus meet specific income and net worth criteria. 

As one of Canada’s fastest-growing non-bank financial institutions, CMI Financial Group has more than $2 billion in successful  mortgage placements since inception. Our whole mortgage investment program provides competitive rates of return and access to high-quality mortgage opportunities across Canada. If you’re an accredited investor looking to supercharge your retirement savings, CMI can help you invest in a single mortgage or multiple mortgages for recurring revenue streams to fund your retirement. 

To learn more about how you can become a private lender with CMI’s mortgage investment program, contact us today and request a free consultation with a CMI Investment Manager.

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