If you’ve been reading about personal finance, you’ve probably heard of RRIF and Annuities before.
That’s because RRIF and Annuity are two of the most important aspects of retirement income and personal finance. Let’s get started.
What Is A Registered Retirement Income Fund (RRIF)?
Registered Retirement Income Fund or RRIF is an arrangement between you and an insurance company, a trusted company or a bank.
All you have to do is – Transfer your property to the carrier from an existing RRSP, PRPP, RPP, SPP, or from another RRIF, and the carrier then makes payments to you.
The minimum amount should be paid to you in the year following the year the RRIF is entered into. Earnings in an RRIF are tax-free and amounts paid out of an RRIF are taxable on receipt.
Did you also know that – You can have more than one RRIF and you can have self-directed RRIFs? The rules that apply to self-directed RRIFs are generally the same as those for RRSPs.
How To Set Up An RRIF?
You can set up a registered retirement income fund (RRIF) account through a financial institution such as a bank, credit union, trust or insurance company.
Your financial institution will advise you on the types of RRIFs and the investments they can have.
Like I said in the previous section, You can definitely have more than one RRIF and you can also have more than one self-directed RRIFs.
Self-Directed RRIF
You may want to set up a self-directed RRIF if you prefer to build and manage your own investment portfolio by buying and selling a variety of different types of investments. The rules that apply to self-directed RRIFs are generally the same as those for RRSPs.
Once the RRIF is established, you can have no more RRIF contributions made to the plan nor can the plan be terminated except through death.
Where To Open An RRIF?
Below is the list of few places where you can open an RRIF
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Banks and trust companies
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Credit unions
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Insurance companies
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Mutual fund companies
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Investment firms
How To Withdraw Money From An RRIF and Rules?
So, here’s how the RRIF withdrawal works – Before you get to the age of 71, the minimum percentage of payout is worked out in the ratio: 1÷(90 – your current age).
Another thing to note here is that RRIF minimums were changed in the year, 2018.
So if you’re 65 years and above, your minimum withdrawal would be 1÷(90-65)=4%. With a $200,000 RRIF, that amounts to $8,000.
Once you’ll reach the age of 65, the following RRIF schedule applies:
| Age | 2015 and onwards | 1992 to 2015 | Before 1992 |
| 65 | 4.00% | 4.00% | 4.00% |
| 66 | 4.17% | 4.17% | 4.17% |
| 67 | 4.35% | 4.35% | 4.35% |
| 68 | 4.55% | 4.55% | 4.55% |
| 69 | 4.76% | 4.76% | 4.76% |
| 70 | 5.00% | 5.00% | 5.00% |
| 71 | 5.28% | 7.38% | 5.26% |
| 72 | 5.40% | 7.48% | 5.56% |
| 73 | 5.53% | 7.59% | 5.88% |
| 74 | 5.67% | 7.71% | 6.25% |
| 75 | 5.82% | 7.85% | 6.67% |
| 76 | 5.98% | 7.99% | 7.14% |
| 77 | 6.17% | 8.15% | 7.69% |
| 78 | 6.36% | 8.33% | 8.33% |
| 79 | 6.58% | 8.53% | 8.53% |
| 80 | 6.82% | 8.75% | 8.75% |
| 81 | 7.08% | 8.99% | 8.99% |
| 82 | 7.38% | 9.27% | 9.27% |
| 83 | 7.71% | 9.58% | 9.58% |
| 84 | 8.08% | 9.93% | 9.93% |
| 85 | 8.51% | 10.33% | 10.33% |
| 86 | 8.99% | 10.79% | 10.79% |
| 87 | 9.55% | 11.33% | 11.33% |
| 88 | 10.21% | 11.96% | 11.96% |
| 89 | 10.99% | 12.71% | 12.71% |
| 90 | 11.92% | 13.62% | 13.62% |
| 91 | 13.06% | 14.73% | 14.73% |
| 92 | 14.49% | 16.12% | 16.12% |
| 93 | 16.34% | 17.92% | 17.92% |
| 94 | 18.79% | 20.00% | 20.00% |
| 95+ | 20.00% | 20.00% |
RRIF – Minimum Rules
Once you reach the retirement age; you’ll have to remove funds from RRSP and deposit them into an RRIF. Although you can make regular withdrawals from an RRSP, the point of an RRSP is to accumulate funds for retirement. That’s why RRSP is called a retirement registered savings plan in the first place.
RRIF is much like an RRSP from the perspective that you can invest in GICs, bonds, mutual funds, stocks, etc. The choice of investment is solely yours, as long as the money stays in the account, whether it is an RRSP or RRIF, the money continues to grow tax-free.
What Is An RRIF Minimum Income?
RRIF differs from an RRSP as you cannot put direct contributions into an RRIF. With an RRIF, you must take out a minimum amount each and every year. This is called the RRIF Minimum Income.
How Do You Transfer Funds To RRIF?
You can only contribute to an RRIF by directly transferring the amount to your account.
The rules that apply to self-directed RRIFs are generally the same as those for self-directed RRSPs. One thing to remember here is that you cannot transfer any part of your retirement allowance to an RRIF.
You can contribute to an RRIF by transferring property directly from:
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your PRPP or un-matured RRSP
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your matured RRSP, including a direct transfer of a commutation payment from your RRSP annuity
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an un-matured RRSP under which your current or former spouse, or common-law partner is the annuitant
2 Key Differences Between An RRIF And RRSP
1. You must always withdraw a minimum amount from your RRIF every year. This amount is based on the market value of your RRIF account and a prescribed percentage that is set by the government based on your age or that of your spouse, depending on which of you is the younger. Note that, there is no maximum withdrawal.
2. After converting your RRSP to an RRIF at the age of 71, you can no longer contribute to a new RRSP fund, even if you have left-over RRSP contribution room.
When you make a withdrawal from your RRIF, you are required to include the amount in your income section for the year and pay tax on it. Withdrawals exceeding the minimum threshold are subject to a withholding tax that your bank will deduct.
Depending on your tax bracket, your tax bill may be adjusted up or down at tax time.
What Is Annuity?
An annuity is a financial product sold by an annuity provider, such as a life insurance company, that will pay you guaranteed regular income. An annuity is typically used for retirement purposes.
How Do Annuity’s work?
You can purchase an annuity with a lump sum or through multiple periodic payments over time.
The income in terms of regular payments you’ll receive from an annuity is a combination of interest, a return on your capital, and a transfer of capital from annuity holders who passed away.
Who Is An Annuity Provider?
Depending on the type of annuity you choose, you can receive income payments monthly, every three months, every six months or once a year. You can also choose to start receiving your income payments right away or to have them start at a later date, which is known as a deferred annuity.
The annuity provider pays you regular income payments.
You can choose to either receive income payments for a fixed period of time or for as long as you live.
The amount of regular income payment you get depends on a number of factors:
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if you are male or female
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your age and your health when you purchase the annuity
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the amount of money you invest in the annuity
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the type of annuity you purchase
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whether your annuity has a guarantee option, which will continue to make payment to a beneficiary or your estate after you die
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the length of time you want to receive payments from your annuity
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the rates of interest when you buy your annuity
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the annuity provider
Types Of Annuities
There are several kinds of annuities. Let’s look at them here.
It is important to understand each type of annuity and what are the options, benefits, and risks each type offers.
Before you go ahead and buy an annuity policy, you need to decide on the below two factors:
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whether or not you want the annuity to continue to be paid to a beneficiary after you die
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whether you want regular income payment or income payment that will increase or decrease regularly
1. Life Annuity
A life annuity is an annuity that provides you with a guaranteed lifetime income. For example, if you buy a life annuity for $200,000 at age 65 with an income of $1000 per month, you get your $200,000 back by age 82. If you live past 82, you will still receive $1000 a month as long as you live.
2. Term-certain Annuity
A term-certain annuity is an annuity that provides guaranteed income payment for a fixed period of time (term). If you die before the end of the term, your beneficiary or estate will continue to receive regular income payments, or receive the balance of the regular payments as a lump-sum.
3. Variable Annuity
A variable annuity is an annuity where the annuity provider invests your money in a product with a variable return, such as equities.
You receive a fixed income as well as a variable income. The fixed income portion you receive from a variable annuity is usually lower than what you would earn with a non-variable annuity, such as a life or term-certain annuity.
The variable portion you receive will fluctuate based on the performance of the investment. This means that you could earn more money if the investments perform well, and less money if they perform poorly.
This is in contrast with a non-variable annuity, which provides guaranteed income payments regardless of what happens in the market.
Types Of Annuities
Annuities offer different options, pay close attention to the pros and cons of each.
1. Life Annuity
A life annuity is an annuity that provides you with a guaranteed lifetime income.
The pros and cons include:
Pros Of Life Annuity
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provides guaranteed income payments for as long as you live
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no risk of outliving your income
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you can add a joint and survivor option to transfer payments to your spouse/partner
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other options can be added to provide money to your beneficiary or estate when you die
Cons Of Life Annuity
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you may pass away before receiving all of your money back
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adding extra options (such as those that provide payments to your spouse when you die) usually means a lower regular payment
3. Term-Certain Annuity
A term-certain annuity is an annuity that provides guaranteed income payment for a fixed period of time.
The pros and cons include:
Pros Of Term-Certain Annuity
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provides a guaranteed income for a set period of time
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your beneficiary or estate will receive any remaining benefit if you die before the end of the term
Cons Of Term-Certain Annuity
- you may live longer than the term of your annuity, meaning you could stop receiving income before you die
4. Variable Annuity
A variable annuity is an annuity where the annuity provider invests your money in a product with a variable return, such as equities.
The pros and cons include:
Pros Of Variable Annuity
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offers a fixed income plus potential extra income linked to market performance
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you may earn more money than a non-variable life annuity if the investments backing the variable portion of your annuity perform well
Cons Of Variable Annuity
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your regular income is harder to predict
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you may earn less money than a non-variable life annuity if the investments backing the variable portion perform poorly
What to consider before buying an annuity?
Before buying an annuity, it’s a good idea to take the following into consideration.
When To Buy An Annuity?
If you choose to purchase an annuity, the best time to buy depends on your personal income needs and sources of income.
For example, you may want more money early in your retirement to help pay for travel or new hobbies. Or you may want more guaranteed income later in your retirement years to help pay for the cost of extra health care or accommodations.
If you want more money later in your retirement then you might want to consider waiting to buy an annuity or purchase an annuity with deferred payments. This means that you pay for the annuity ahead of time but won’t start receiving payments right away. Deferred life annuities provide higher regular payments than immediate life annuities. This is because you will receive fewer payments during your life.
If you are thinking about buying an annuity, consider speaking with a financial professional for help figuring out what the appropriate features are for you, when to buy it and when to start receiving payments.
Your Other Sources Of Retirement Income
Your retirement income may come from a number of places.
This may include:
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an employer pension plan
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registered savings vehicles, such as a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA)
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public pensions and benefits, such as Old Age Security (OAS), the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
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personal savings and investments
An annuity provides you with a regular income during your retirement years. This can make it easier to create a budget and manage your money, especially if you don’t have another regular source of retirement income. For example, you may want to buy an annuity with money from a defined contribution employer pension plan.
An annuity may not be the best option for you if your regular income and savings will already cover your expenses when you retire. You should speak with a financial professional to help figure out whether you will have enough money available to meet your needs when you retire.
The Overall Price You Pay For An Annuity Can Vary Between Providers
Annuity providers may offer you different income payments for the same type of annuity.
This is because the annuity provider calculates the amount of monthly income they can provide based on several factors such as:
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the type of annuity (fixed or variable) that you choose
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the term of the annuity that you choose (life-only, joint life, term certain)
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your age and gender (so they can estimate your life expectancy)
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their operating costs
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the return they expect to receive on their investments
Before purchasing an annuity, ask for a complete listing of fees and commissions. Make sure you understand contract restrictions, including penalties and administrative fees.
Once you think you know what kind of annuity you are interested in purchasing, it is a good idea to compare similar products from several providers.
Whether You Want To Leave Money To A Beneficiary or Your Estate
If you want to leave money to your estate or a beneficiary when you die, you may want to consider buying a term-certain annuity or a life annuity with either a joint and survivor option or a guaranteed payment period.
The annuity option is not the only option. For example, you can keep some of your money in an account or product other than an annuity, like in a personal savings account or TFSA or a Registered Retirement Income Fund (RRIF). Otherwise, you may not be able to do so with a standard life annuity.
You May Lose Money With Annuity
You will receive more money from a life annuity the longer you live. However, you may not live long enough to get all of the money you paid to purchase the annuity in the first place.
Annuities May Require A Larger Investment
You may need a large amount of money to buy an annuity. For example, many annuity providers may ask that you invest $50,000 or more to buy an annuity.
Tax Implications On Annuities
You will have to report the money you get from an annuity as income when you file your taxes. You may have to pay tax on this money.
The amount of tax you may pay will vary depending on whether you buy your annuity using money from a registered savings plan, like an RRSP or RRIF, or a non-registered plan, like a personal savings account.
How Your Annuity Income Is Protected
Canadian life insurance companies are required to be members of a consumer protection agency called Assuris.
Assuris protects policyholders up to a certain amount in the event that the annuity provider is unable to pay. This means that you will continue to receive at least some of your money if your life insurance company goes out of business.
The income you receive from an annuity is as follows:
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100% for monthly payments up to $2,000
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85% for monthly payments above $2,000
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For example, if your regular annuity income is $1,500 per month, you will continue to receive the full amount as this is less than $2,000. If your regular annuity income is $3,000 per month, then you will continue to receive 85% of this amount or $2,550.
Annuities Cannot Be Changed Or Cancelled Easily
To buy an annuity you enter into a contract with the annuity provider. Typically, once you buy an annuity, the terms of the contract can’t be changed. This means you can’t switch to a different type of annuity or get your money back.
Annuity Cooling-Off Period
Your annuity contract may have a cooling-off period. This means that you can cancel the contract without having to pay a penalty within a specific amount of time. Be sure to read your annuity contract carefully to see if it includes a cooling-off period.
You may have the option under the contract to cancel your annuity within a certain time period after you start receiving payments. Typically, there is a fee to do this which can be a percentage of the purchase price of the annuity.
Speak with your annuity provider for more information about the contract and your rights to change or cancel an annuity.
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