For years, chances are you've been building up a nest egg by contributing to a Registered Retirement Savings Plan, but when the time comes, many of us wonder how those RRSPs will be converted to a reliable source of income.
Perhaps the most tax effective option is to convert the savings into Registered Retirement Income Funds (RRIFs). This provides you with a steady source of income and like RRSPs, these funds also allow for tax-deferred growth.
Ontario's leading credit union, Meridian, answers some frequently asked questions about RRIFs to help make the transition smoother:
When should I open a RRIF? You must convert your retirement savings into retirement income by December 31 of the year in which you reach age 71. However, you don't need to wait until you're 71 to open a RRIF or withdraw money. In fact, some may argue that it's beneficial to withdraw earlier because your withdrawals will be taxed more heavily later in life when your income increases due to Old Age Security and Canada Pension Plan payments. Keep in mind that once you open a RRIF, you must start drawing money the following year and continue to withdraw annually.
On the question of how much to withdraw, there is a minimum amount you must withdraw every year, but no maximum. The minimum is a percentage of the assets inside the account and increases with age until you hit the age of 94. Depending on your needs, you can withdraw once a year or more frequently. Keep in mind however that all withdrawals are taxable and if you take out more than the required minimum you will need to pay withholding tax on the excess amount.
Can I invest money in a RRIF, you ask? Yes, you can withdraw some income and continue to grow the rest of the money tax-free by investing as you please whether it be GICs, mutual funds or stocks and bonds. If retirement is on the horizon, you should develop an investment strategy to ensure the plan meets your retirement income needs. If you're unsure of what to do, seek professional help from a financial advisor and review your strategy every year in case any life changes impact your financial needs.
