Learn how to manage a Registered Retirement Income Fund (RRIF)
When it comes to retirement, there’s more to think about than simply collecting your pension.
Education members are no different from other types of workers; they think about taking the right steps to manage their financial situation in retirement. If you’ve been making regular contributions to a Registered Retirement Savings Plan (RRSP), congratulations—you’re already halfway to maximizing your cash flow in retirement!
However, don’t forget about having a plan in place for converting your RRSP.
According to Educators Certified Financial Planner professional Lisa Raponi, “Many educators retire earlier than the average Canadian, so it’s especially important for them to include sufficient time for developing the right RRSP conversion strategy.”
When it comes to converting your own RRSP, here’s what you need to consider:
1. Timing is everything (especially for education members).
By law, your RRSP must be collapsed into a tax-deferred income plan by the end of the year you turn 71. You may want to set yourself a reminder because if you miss the deadline, there are costly consequences (i.e. the entire value of the RRSP becomes taxable income!). As for which vehicle to collapse your RRSP into, many Canadians choose to convert their RRSP to a Registered Retirement Income Fund (RRIF).
You should know, however, that it’s not necessary to wait until you’re 71. In fact, you may not want to. Your timing for RRSP conversion should reflect the sources of your retirement income and how they impact your taxes (see more on this below in #5).
2. Understand the different kinds of RRIFs.
These include self-directed, fully managed, guaranteed interest, mutual fund, and segregated fund. What you choose will depend on how much flexibility you are looking for. To ensure you select the best RRIF option(s) for you, it’s always best to consult with a Certified Financial Planner professional.
3. Investments in a RRIF continue to accumulate earnings.
Keep in mind that once your RRIF is set up, you cannot make additional contributions, and it can’t be terminated (except by the holder’s death).
4. There is a minimum withdrawal required from your RRIF each year.
The government uses a formula (based on your age and the value of your RRIF at December 31 of the previous year) to determine your minimum annual RRIF withdrawal. While minimum withdrawal amounts increase with age, there is no maximum limit on the amount that can be withdrawn.
Here are some examples of minimum withdrawals on a RRIF with a value of $100,000 on December 31st:
| Age | Minimum withdrawal % | Minimum withdrawal $ |
| 71 | 5.28% | $5,280 |
| 83 | 7.71% | $7,710 |
5. Work with a financial expert who knows about education members’ compensation (they’ll know how to minimize your taxes).
The total amount you withdraw from your RRIF is taxable at year-end. In addition, withdrawals above your established minimum will be hit with a withholding tax. So it’s important to get tax advice from someone who truly understands your source(s) of retirement income (e.g. OTPP/OMERS) in order to minimize the tax implications.
For example, you most likely know that the Old Age Security (OAS) benefit will increase your taxable income. However, did you know that part of your OAS is clawed back if your income exceeds $81,761? Therefore, if you’re going to be in a lower tax bracket before age 65, it may make sense to withdraw more from your RRSP.
Tip: As a member of the education community, you need to think twice about the pension-income tax credit.
6. Put ‘income splitting’ to work.
Income splitting with your spouse can really pay off. If you’re 65 or older, up to half of RRIF withdrawals can be given to your spouse. Those withdrawals can then be attributed to their taxable earnings. In addition, you’re allowed to use your spouse’s age to calculate the minimum withdrawal. If your spouse is younger than you, this will reduce the amount taken out of the account and reduce the taxable income.
7. Think ‘down the road’ by naming a beneficiary.
Naming a beneficiary ensures that the RRIF is excluded from the calculation of probate fees on your estate. This means that if you name your spouse as your beneficiary, they can automatically start receiving payments from the RRIF. If the beneficiary is a financially dependent child or grandchild, they can use the RRIF funds to purchase a term annuity or transfer it to their RRSP.
8. Consider converting your assets into a single RRIF for convenience.
Consolidating assets from various RRSPs into a single RRIF will help you better control cash and income flow.
9. Adjust your portfolio throughout your retirement.
As mentioned earlier, education members typically retire sooner than most Canadians. There’s a lot that can happen during that long retirement, so it’s a good habit to review your financial situation against your RRIF (and other sources of income) at least once a year, so you can make any adjustments as needed.
If you’re still unsure about the whole RRSP-to-RRIF conversion process, Educators Financial Group is here to help.
As an organization that is very familiar with all of the nuances of an education member’s financial situation (like pay grids and pension income), we can provide the right kind of advice for your specific goals and time of life.
