Money & Career
5 things you need to know about retirement funds and RRIFs
Money & Career
5 things you need to know about retirement funds and RRIFs
Did you know that your RRSP, the retirement funds vehicle you've spent so many years contributing to, automatically closes the year you turn 72? But don't worry -- the money doesn't disappear. On December 31 of the year you turn 71, your RRSP savings get transferred into a RRIF, a registered retirement income fund.
At that point, you're forced to withdraw your savings by a certain percentage every year. Funds can still grow in an RRIF, but you can't add more money to it.
It's something every Canadian with RRSP savings will have to go through at some point, so make sure you're not caught off guard when you turn 72 and plan for retirement. Here are five things you need to know about RRIFs.
1. You're forced to withdraw
Whether you need the money or not, when you turn 72 you must start withdrawing money from your RRIF. There is a minimum withdrawal amount, which starts at 7.38 per cent of your total assets and then climbs a bit every year.
When you hit 85, you'll have to take out 10 per cent; at 94 you'll be removing 20 per cent from your retirement funds.
Cynthia Kett, a certified financial planner with Toronto's Stewart & Kett Financial Advisors Inc., says that if you only take the minimum amount out, your assets won't get to zero (the required withdrawal never reaches 100 per cent of the total). "But at some point it might get small enough that you'll just [choose to] take it all, " she says.
2. You can use start using your RRIF early
You don't have to wait until you're 72 to convert to and withdraw from your RRIF, says Kett. If you plan for retirement early, you can start using an RRIF when you're 55, at which age you'd only be forced to remove 2.86 per cent of your assets. But remember, once your RRSP becomes a RRIF, you can't add anything more to the retirement funds account.
Page 1 of 2 -- read more ways to manage your retirement funds on page 2
3. Don't forget the taxman
Here's the bad part about retirement -- all that money you grew tax free in an RRSP (and earned nice income tax returns from when you made the investment) will now be taxed based on your income.
For anyone whose income is still significant, the tax hit could be huge. Others who aren't bringing in any extra dough won't have to pay the government as much.
Canadians also have to worry about withholding tax, which is money that's sent to the government to pay for things like Employment Insurance and Canada Pension Plan payments. The money is deducted by the investment company and shipped straight to Ottawa, the same way withholding tax is removed from a paycheque before you get it.
If you withdraw the minimum amount, you don't have to pay this tax. But between the minimum and $5,000 you'll pay 10 per cent, between $5,000 and $15,000 you'll pay 20 per cent, and $15,000 or more is subject to 30 per cent. Fortunately, you will get some of it back after you file your taxes, says Kett.
4. Make use of pension splitting
The beauty of a RRIF is that any money taken out of an account can be split with a spouse or common-law partner. Your partner is allowed to claim no more than 50 per cent of the withdrawal on their income.
This is useful if one partner is collecting a pension or still working and is in a higher tax bracket, while their spouse is in a lower tax bracket. Split the income and the higher earner will pay a lot less tax.
5. You can still play around with your investments
Have no fear, avid investors: Just because your RRSP is no longer active doesn't mean you can't take that new stock out for a test drive. (Whether you should be picking stocks at 72 is another story.) While you can't add more money to a RRIF, you can still move your dollars around.
If you're feeling nervous about a certain mutual fund, for example, you can move your investment, tax-free, into another one. Your investments can still increase in value too, but it's unlikely they'll grow at a higher rate of return than what you're forced to withdraw.
With people working later in life and having more income when they retire, it's debatable whether RRIFs are as relevant today as they were when they were first introduced in 1978. But still, don't shed a tear for your dearly departed RRSP. If you've got the money, you might as well use it.
Page 2 of 2
At that point, you're forced to withdraw your savings by a certain percentage every year. Funds can still grow in an RRIF, but you can't add more money to it.
It's something every Canadian with RRSP savings will have to go through at some point, so make sure you're not caught off guard when you turn 72 and plan for retirement. Here are five things you need to know about RRIFs.
1. You're forced to withdraw
Whether you need the money or not, when you turn 72 you must start withdrawing money from your RRIF. There is a minimum withdrawal amount, which starts at 7.38 per cent of your total assets and then climbs a bit every year.
When you hit 85, you'll have to take out 10 per cent; at 94 you'll be removing 20 per cent from your retirement funds.
Cynthia Kett, a certified financial planner with Toronto's Stewart & Kett Financial Advisors Inc., says that if you only take the minimum amount out, your assets won't get to zero (the required withdrawal never reaches 100 per cent of the total). "But at some point it might get small enough that you'll just [choose to] take it all, " she says.
2. You can use start using your RRIF early
You don't have to wait until you're 72 to convert to and withdraw from your RRIF, says Kett. If you plan for retirement early, you can start using an RRIF when you're 55, at which age you'd only be forced to remove 2.86 per cent of your assets. But remember, once your RRSP becomes a RRIF, you can't add anything more to the retirement funds account.
Page 1 of 2 -- read more ways to manage your retirement funds on page 2
3. Don't forget the taxman
Here's the bad part about retirement -- all that money you grew tax free in an RRSP (and earned nice income tax returns from when you made the investment) will now be taxed based on your income.
For anyone whose income is still significant, the tax hit could be huge. Others who aren't bringing in any extra dough won't have to pay the government as much.
Canadians also have to worry about withholding tax, which is money that's sent to the government to pay for things like Employment Insurance and Canada Pension Plan payments. The money is deducted by the investment company and shipped straight to Ottawa, the same way withholding tax is removed from a paycheque before you get it.
If you withdraw the minimum amount, you don't have to pay this tax. But between the minimum and $5,000 you'll pay 10 per cent, between $5,000 and $15,000 you'll pay 20 per cent, and $15,000 or more is subject to 30 per cent. Fortunately, you will get some of it back after you file your taxes, says Kett.
4. Make use of pension splitting
The beauty of a RRIF is that any money taken out of an account can be split with a spouse or common-law partner. Your partner is allowed to claim no more than 50 per cent of the withdrawal on their income.
This is useful if one partner is collecting a pension or still working and is in a higher tax bracket, while their spouse is in a lower tax bracket. Split the income and the higher earner will pay a lot less tax.
5. You can still play around with your investments
Have no fear, avid investors: Just because your RRSP is no longer active doesn't mean you can't take that new stock out for a test drive. (Whether you should be picking stocks at 72 is another story.) While you can't add more money to a RRIF, you can still move your dollars around.
If you're feeling nervous about a certain mutual fund, for example, you can move your investment, tax-free, into another one. Your investments can still increase in value too, but it's unlikely they'll grow at a higher rate of return than what you're forced to withdraw.
With people working later in life and having more income when they retire, it's debatable whether RRIFs are as relevant today as they were when they were first introduced in 1978. But still, don't shed a tear for your dearly departed RRSP. If you've got the money, you might as well use it.
Page 2 of 2
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