Episode 10: Retirement Income Options

[00:00:05] Welcome to the Retire Ready Podcast, the podcast that helps Canadians prepare for all their retirement brings. I'm your host, Scott Sather, Founder, President, and Financial Planner at Awaken Wealth Management and Portfolio Manager with Awaken Wealth Management Investments of Aligned Capital Partners in Regina, Saskatchewan.

[00:00:21] Thanks for joining me today. So far in this series, we've talked a lot about the different vehicles for retirement savings. Today, we're going to switch things up and discuss the income side. That is, how do I spend the money I've saved for retirement, and more so in the context of the money we've saved through the Registered Retirement Savings Plan, or RRSP. We'll cover the ins and outs: withdrawal minimums, when and how you can access them, investment options, and estate planning. Now, as the name implies, the Registered Retirement Savings Plan is meant for saving for retirement. But you can withdraw from it as well. Because it's meant as a savings vehicle, it's best to only use it in one-off situations like a lump sum expense for a trip or a bigger purchase.

[00:01:00] Again, remember that any withdrawal is taxable to you and is ideally made in retirement when your income is likely lower. If you're looking for a regular stream of income to recreate your paycheck in retirement, you're best off converting some or all of your RRSP to the Registered Retirement Income Fund, or RRIF. This account, as the name mentions, is meant for income in retirement. The RRIF is, again, an account and, again, an often misunderstood account. We continue to see a recurring theme here.

[00:01:31] Right? Lots of misunderstanding around the different registered accounts for Canadians, which I personally chalk up to many years of financial institutions focusing on selling products and gathering retirement assets, and not on educating investors and financial planning. That's a topic, though, for another episode. From an investment perspective, the rules that apply to RRIFs are generally the same as those for RRSPs, so lots of investment options. Just because you move the money from the RRSP to the RRIF doesn't mean you necessarily need to change your investments. You can still hold all the same things in your RRIF as you do in the RRSP. However, in some cases, such as opening a self-directed RRIF, you will want to make sure you have assets that are liquid or providing enough income to cover the payments being made. Most RRIF accounts allow a ton of flexibility to set up that retirement income.

[00:02:21] You can set up annual, semi-annual, quarterly, or monthly payments. You can decide which days of the month you want the payment and how much tax you'd like withheld. Now, this last one is a little bit tricky, as the CRA still has the same rules as the RRSP for withdrawals. Meaning the first $5,000 has 10% withheld, $5,001 to $15,000 has 20%, and anything over $15,000 has 30% withheld. But there are some strategies you can use to lower the taxes withheld, remembering that come tax time, you're going to have to pay whatever the actual amount of tax owing is. If your net tax owing for the current year or the last two subsequent years is over $3,000, you may need to pay quarterly installments, which in my experience, most people, especially retirees, do not enjoy doing. Okay, let's discuss how you can reduce that tax withheld, if you want to do that. There's no point in paying Ottawa more tax upfront than needed. To do that, we first need to discuss the minimum payment that has to be withdrawn from the RRIF. Now, you don't have to start withdrawing on your retirement savings until the year you turn 72. Many think it's age 71, but that's just the age you need to collapse your RRSP.

[00:03:35] The minimum payment doesn't start until the following year when you turn 72. We discussed this in episode seven: the year you turn 71, you have to get those funds in your RRSP or your LIRAs out by the end of that year, either by withdrawing the whole amount, which again means paying taxes on the whole amount—likely not the best option—or you can move the funds to an annuity, which is an insurance product that pays you an income for life based on your age, interest rates, and the amount invested, or you can move to a more popular option.

[00:04:05] The RRIF. You have until December 31st in the year you turn 71 to do this. Your RRIF provider will then look at the balance on December 31st of each year and calculate the minimum payment for the following year. The minimum withdrawal is calculated by a prescribed rate for age 71 and above, which we will share a link to in the show notes. For age 70 and under, the minimum withdrawal is calculated as one divided by 90 minus your age at the beginning of the year.

[00:04:33] You can also use your spouse's age instead of yours to calculate that minimum for the plan, which could allow a lower minimum for those with younger spouses. Now, the CRA doesn't require any taxes to be withheld on your minimum payment. So, you can use this to your advantage if you want to reduce the overall taxes withheld. Again, speak to your financial planner to see how this may apply to you.

[00:04:55] For those with a spousal RRIF, you want to be aware of the spousal attribution rules, as they are still the same as the Spousal RRSP. That is, in the year the contribution is made and the following two years, the income goes to the contributing spouse on any withdrawals, thereby negating the spousal contribution.

[00:05:13] There wasn't any point in doing that, no advantage. After that time, it's taxed in the account holder's name. However, with the spousal RRIF, the minimum withdrawal is taxed in the hands of the account holder, not the spousal contributor. So, keep that in mind in your planning. From a tax perspective, you may have the ability to split this income once you're over 65 with your spouse, and the first $2,000 of withdrawal could receive the pension tax credit federally and $1,000 provincially, as long as you're not already receiving a pension and using this credit. So, that means up to that $2,000 you can take out tax-free over age 65, again assuming you're not already receiving that pension income. Another benefit of the RRIF is creditor protection. In the unfortunate event of bankruptcy, your RRIF enjoys certain protections, offering some peace of mind. However, there may be some things to consider with this, so speak to your planner and lawyer to be sure. Just a reminder: converting your RRSP to a RRIF does not trigger any taxes. This means you can make the switch without worrying about any immediate tax hit. I just wanted to make sure I stress this point. As well, you can still contribute to an RRSP if you have a RRIF, at least until the end of the year when you turn 71. You're also able to switch back and forth, so if you have an amount in the RRSP and you move it to a RRIF and then decide you don't need that income before 71, you can still move it back to the RRSP and turn off that minimum payment that you'd have to take.

[00:06:42] Lastly, just like the RRSP, you can name a beneficiary to the RRIF account, which allows the money to transfer tax-deferred to your spouse, dependent child or grandchild under age 18, or a financially dependent mentally or physically infirm child or grandchild of any age. If you name someone other than these, the funds will come out of the RRIF and be taxed in the hands of the estate, but they will still bypass probate because you named that beneficiary.

[00:07:09] There's also the ability to name a spouse as a successor annuitant. This basically means the name of the deceased drops off the RRIF, and the spouse's name is added. All the income information stays the same. This enables them to take on ownership of the RRIF without the need of possibly setting up their own account or having to transfer funds out of the account. Upon your death, your successor annuitant assumes ownership of your RRIF account with no tax consequences to your estate. A RRIF can be opened up at any time after age 18, but for most, it makes the most sense to do so once they're in or near retirement.

[00:07:44] Okay, that's a wrap on today's episode about the Registered Retirement Income Fund. Thanks for tuning in to the Retire Ready Podcast. If you found this episode helpful, please don't forget to subscribe, give us a five-star review, and share it with your fellow retirees and future retirees. You can email info@retirereadypodcast.com with any questions or ideas for future topics.

[00:08:06] All of the links and resources in this episode, along with the show notes, can be found by visiting retirereadypodcast.com and going to the Episode 10 page. For even more resources to get you ready for retirement, you can subscribe to The Wake-Up semi-monthly newsletter by visiting the Awaken Wealth Management website, which is awakenwealth.ca. Thanks again for joining me today, and I look forward to seeing you back on the next episode.