What Do You Mean by Registered Retirement Income Fund (RRIF)?
- You can think of an RRIF as a retirement vehicle, which allows you to withdraw money from it after your retirement. It works in the same way as any annuity product.
- You can roll over/ transfer the funds accumulated in your RRSP (Registered Retirement Savings Plan) to an RRIF.
- You can withdraw these funds (up to a specified limit) after retirement and support yourself by developing a retirement income stream.
- Whatever you earn in your RRIF account is tax-sheltered. You are not required to pay any tax upon such earnings.
- However, you will be required to pay the taxes as soon as you withdraw money from your RRIF. RRIF pay-outs attract taxation liability, and you need to include them in your taxable income.
- The government of Canada has allowed banks, insurance companies, and other financial intermediaries to carry a license to offer an RRIF to Canadian citizens. We usually call such institutions carriers.
- LIF (Life Income Fund) is a popular type of RRIF. You can hold your pension funds in a LIF that will be invested per your directions and in assets you prefer.
- LRIF (Locked-in Retirement Income Fund) is another type of RRIF and marginally differs from a LIF.
How Does A RRIF Work?
As per the Government of Canada, an RRIF is a contract between you and a licensed carrier paying you after retirement.
Let us now understand the functioning of an RRIF through nine simple points mentioned below:
|1.||You must have saved a portion of your income (also known as pension funds) in an RRSP (Registered Retirement Savings Plan).|
|2.||You will invest these savings and grow with the efflux of time.|
|3.||At 69, convert your RRSP into an RRIF (either a LIF or LRIF).|
|4.||Upon such a conversion, your pension funds will still be tax-sheltered, and you do not attract any tax liability.|
|5.||You can open more than one RRIFs (Registered Retirement Income Fund) and that too in any combination. For example, you can have one RRIF with a Bank, one with an insurance company, and another with a licensed financial intermediary. Additionally, you can have self-directed RRIFs too.|
|6.||Your carrier will pay you a minimum amount annually. This pay-out will begin next year, after the year in which you have established an RRIF.|
|7.||You are eligible to get a pay-out from the RRIF for the rest of your life.|
|8.||This pay-out varies every year and is decided by your carrier at the beginning of each year. Usually, a carrier considers your age while determining the amount payable from an RRIF.|
|9.||However, you do get an option wherein you can instruct your carrier to determine the amount payable based on the age of your spouse or common-law partner. This decision will be irreversible and once elected, you cannot change it later.|
What Are the Different RRIF (Based on Investment)?
Retirement planning revolves around the accumulation and growth of money. While you can certainly control the former, that is the amount of contribution, lack control over the latter, that is how much your pension funds will grow over a period.
Thus, to reduce this uncertainty, several carriers have produced diverse RRIFs, which invest pension funds in investment assets and follow their strategies. Let us have a look at the five most popular types of RRIFs:
|Name of the RRIF||Major Investment Asset||Description|
|Guaranteed Interest RRIF||General Investment Certificates (GICs) Canada Savings Bonds (CSBs)||• If you are a conservative investor and prefer no volatility, then a Guaranteed Interest RRIF can work best for you|
• GICs and CSBs are the safest investment assets in Canada.
• Your pension funds will not be subject to market risk (unless you invest in a market-linked GIC) and will grow over time at a contracted rate.
|Mutual Fund RRIF||Mutual Funds||• Based on your risk appetite and tolerance level, your pension funds will be invested in different types of Mutual funds.|
• You must identify which type of investor you are and follow the below recommendations:
Type of Investor: Mutual Fund Focused On:
Conservative: Government securities
Moderate: Hybrid Investments (a mix of equity and debt)
|Segregated Fund RRIF||Investment is done by an Insurance Company||• You can establish this type of RRIF with an insurance company, which will invest your pension funds as per their investment strategies and discretion|
• You will get protection wherein the insurance company guarantees to pay back 75% to 100% of your investment, subject to certain conditions.
• You will grow your funds at a comparatively faster pace and that too with coverage of default risk.
|Self-directed RRIF||Stocks, Debentures, ETFs (Exchange Traded Funds), Mutual Funds GICs, CSBs, etc.||• You can establish such an RRIF with any investment firm|
• You can invest your money in any of the investment assets and in any combination that satisfies your risk appetite.
• This type of RRIF gives you maximum control over your investments.
|Fully Managed RRIF||Investment is done by a money manager||• This type of RRIF is suitable if you have accumulated a large corpus of pension funds|
• A professional investment/ money manager will handle your money and will design a customized portfolio for you to generate maximum returns
• Usually, you open this RRIF with an investment firm that hires professional money managers.