To RRIF or not to RRIF

TO RRIF OR NOT TO RRIF
An article by Robert Cross that appeared in KIT, Winter 2002.

Do you turn 69 this year and have an RRSP? If so, you have to exercise several options before the end of the year. They are; cash in your RRSP, buy an annuity with your RRSP, or convert your RRSP to a RRIF (Registered Retirement Income Fund).

One of the big issues facing the retiree is to decide which option to take. For most retired people, taking all the proceeds of an RRSP in one lump sum is not a good idea because all of the proceeds are taxed completely at the marginal rate in that year. This extracts a big chunk of your hard earned investment and passes it along to the government.

Other retired people, faced with the need to convert an RRSP, have turned to purchasing either a Life Annuity or a Term Certain Annuity. This means buying an annuity from a life insurance company in return for a guaranteed annual income for life. Many retired people have used the annuity option in the past because annuities are safe, predictable, and secure. Most recently, however, the annuity has lost its appeal because of low interest rates, losing control over your money, and, in various cases, no benefit to the estate.

Many retired people are now turning to Registered Retirement Income Funds (RRIFs) as a more appropriate option for converting their RRSPs. RRIFs can be looked at as a continuation of your RRSP with the same kind of tax sheltering features for interest, dividends, and capital gains. As an investment vehicle a RRIF can contain the same kind of securities that you have in your RRSP, such as: GICs, Bonds, Stocks, and Mutual Funds. One of the major differences between an RRSP and a RRIF is that you have to take out a minimum taxable amount from your RRIF each year into income. These withdrawals must start, at the latest, at the end of the calendar following the establishment of your RRIF.

RRIFs have become popular for a variety of reasons. First, they allow you to retain control over the investment mix of fixed income and equity securities that were in your RRSP. Second, they give you a degree of future flexibility that enables you to choose a RRIF now and an annuity later, if you require other forms of income. Third, they provide an estate benefit, so that either your spouse and/or your beneficiaries get the remainder. Although, for a spouse, the RRIF can be passed along directly. Fourth, a RRIF has the potential to provide a measure of protection against the erosion of capital through inflation. Unlike an annuity, the investments inside a RRIF keep working for you in a tax-sheltered environment that can allow your investments to grow. Fifth, a RRIF provides a degree of investment flexibility, so that you can alter your investment mix of fixed income to equity securities to adjust to changing financial and economic conditions. In this article I’ve tried to make the case for considering a conversion of an RRSP to a RRIF as a viable option.

But, whether you ‘RRIF’ or not depends on your investment personality, personal circumstances, and your income needs. Keeping in mind that each individual’s financial situation is different, you should consult with an investment advisor or financial planner to help you make a decision regarding your RRSP.

This article should be considered as an introduction to the topic and should not in any way be construed as a substitute for professional financial advice.