Everything You Need to Know
Written by Jim Yih
Most Canadians choose a
Registered Retirement Income Fund (RRIF) as their retirement income option
. A RRIF is a
comfortable transition because of its similarity to an RRSP. A RRIF provides a
high level of control over the investments in your retirement plan, the
advantage of tax-free growth of assets within the plan, as well as maximum
flexibility in establishing an income stream. RRIFs come in a number of shapes and sizes
The first decision is
The first thing you will
need to determine is how much income you need
or want. This
decision will have the greatest impact on the longevity of your money. If you
spend too much too fast, you will run out of money. Even if you don’t need or
want the extra income, you have the minimum income rules to contend with.
You can tailor your income
to your needs, subject to minimums imposed by the federal government. If you
need steady monthly, quarterly, or annual income, it’s available. If you
require a large lump sum for a major purchase, travel, or some other purpose,
that’s available too.
RRIF withdrawal rules
This table outlines the minimum withdrawals
RRIFs established after 1992, as set by the government. Before age 71, the
minimum percentage payout is worked out in the following way: 1÷(90 – your
RRIF minimums were once again changed in 2015
So if you’re 65, your minimum withdrawal would be
1÷(90-65)=4%. With a $100,000 RRIF, that amounts to $4,000. Once you reach age
69, the following schedule applies:
2015 and later
1992 to 2015
The second decision is what
to invest in
offer plans that can hold Guaranteed Investment Certificates (GICs), mutual
funds, cash, or other financial instruments. Alternatively, you can establish a
self-directed RRIF to include a combination of individual securities in your
plan, such as stocks, bonds or Treasury bills (in addition to the investments
RRIFs offer investment
flexibility. You can hold the same investments that are eligible for an
RRSP. Shares of Canadian corporations, corporate and government bonds, Canada
Savings Bonds, Treasury bills, mortgages, GICs, term deposits, covered call
options, warrants, rights, and mutual funds that invest in eligible securities
are all qualifying investments. You can also hold a limited percentage of your
RRIF in foreign investments. Just like an RRSP, a RRIF lets you retain control
over your investments, rather than handing over your money to a third party.
The longevity of your RRIF
is simply based on how much money you make in investment return and how much
you take out for income. It does not take a lot of mathematical know how to
figure out that if you earn more money than you withdraw in income, the RRIF
For example, if you invest
in a GIC RRIF at 6% and you take out the minimum (4.76%) at age 69, your RRIF
should grow by 1.24%. At age 72 given the same investment return, the minimum
is now 7.48%. This means your RRIF will deplete in value by 1.48%
What will happen to your
RRIF when you die?
You can leave your
remaining RRIF assets to your heirs upon your death by designating the proper beneficiary
Not all other retirement income options provide for this. Naturally, your
desire to provide an estate for your spouse, beneficiaries or charities may
have an impact on how you set up your RRIF. While this may or may not be an
issue, income and investments should remain the priorities.
RRIFs are flexible
One of the benefits of the
RRIF is the flexibility you have in dictating income. These are some common
types of RRIFs.
- Minimum income RRIF – This RRIF provides the
minimum level of income. Typically, people who choose the minimum income RRIF
are those who do not need the money and want to defer taxable income for as
long as possible. Remember, if this is the case, you can base the RRIF on the
age of your younger spouse.Furthermore, remember the RRIF minimum income is
based on the value of the RRIF on December 31 of the previous year. Sometimes
this can make income planning difficult because you really don’t know what your
income will be until the last minute.
- Capital preservation RRIF – Preserving capital and
paying out a fixed level of income are the goals of this RRIF type. In this
case, you will withdraw your investment returns each year (subject to
minimums). If you are using mutual funds, you might elect a reasonable target
return like 8%, for example, with the hopes and intentions of earning 8% to
maintain the capital.
- Level income RRIF – If you want to provide
income for a specific period of time such as to age 90, this RRIF would be the
right choice. In this instance, you would determine the amount of income you
could derive so that the entire asset would be depleted by the time you reach
90 years of age. You can use age or time frame.Have as many RRIFs as you
wantYou can have as many RRIFs
as you want. You can have one that pays a level income for the next 5 years to
bridge income until government benefits. You can have another that is a capital
preservation RRIF for a more stable long term level of income.Generally, many people
consider consolidating into one RRIF. With a single RRIF, you can easily manage
your investments and you’ll only have to worry about one minimum withdrawal.
Several RRIFs require more time and energy, and you’ll have to arrange to
withdraw at least the minimum from each one.Withholding tax detailsRRIF income is subject to
government withholding tax rates. Just like your employer withholds
taxes and remits them directly to the government, your RRIF administrator is
required to do the same. Minimum income RRIFs are not subject to withholding
tax, but you can request any level of withholding tax desired. In all other
circumstances, there is a 10% withholding rate on withdrawals less than $5000,
20% on withdrawals between $5000 and $15,000 and 30% tax on withdrawals over
$15,000.As you can see, there are a
lot of issues to deal with when it comes to planning your RRIF income. Take the
time to plan wisely.
Enjoy the benefits of filing on time and online
Did you know?
Filing your income tax and benefit return and
paying what you owe on time helps you avoid possible interest and penalty
charges, and ensures that your benefits won't be delayed.
have until midnight on or before April 30, 2015, to file your 2014 income
tax and benefit return.
- If you
or your spouse or common-law partner is self-employed, you have until
midnight on June 15, 2015, to file your return.
balance owing must be paid on or before April 30, 2015—even if your return
is due on June 15, 2015.
What happens if I don't file on time?
When you file your yearly tax return, you are
letting the Canada Revenue Agency (CRA) know your current tax situation.
Without that information, the CRA can't be sure that you are still eligible to
receive certain benefit payments. If you don't file on time, your benefit and
credit payments (for example, the Canada child tax benefit and the goods and
services tax/harmonized sales tax credit) may be interrupted.
Also, if you have a balance owing and you don't
file your return on time, we'll charge you a late-filing penalty. The penalty
is 5% of your 2014 balance owing, plus 1% of your balance owing
for each full month that your return is late, to a maximum of 12 months.
If we charged a late-filing penalty on your return for 2011, 2012, or 2013,
your late-filing penalty for 2014 may be 10% of your 2014 balance owing,
plus 2% of your 2014 balance owing for each full month that your return
is late, to a maximum of 20 months.
In addition to the late-filing penalty, if you
have a balance owing for 2014 you'll be charged compound daily interest
beginning May 1, 2015, on any unpaid amounts owing for 2014.
Even if you can't pay all of your balance owing
right away, you should still file your return on time. You can set-up a
pre-authorized debit agreement using the My Account service, or call us at
1-888-863-8657 to make a payment arrangement. By filing on time, you'll avoid
the late-filing penalty.
CRA online services make filing easier and
getting your refund faster
The CRA's online services are fast, easy, and
secure. You can use them to file your income tax and benefit return, make a
payment, track your refund, receive your notice of assessment, and more. Did
you know that the Government of Canada is switching to direct deposit for
payments that it issues? This includes your tax refund and benefits payments?
Sign up for direct deposit today! For more information, go to www.cra.gc.ca/getready
What mistakes are made when
Written by Wayne Rothe
In two decades of helping
people with their money, I’ve learned that most people – left to their own
devices – make mistake after mistake. They do precisely the wrong thing at the
worst time – zigging when they should be zagging. These errors crush
people’s finances and scuttle their retirement dreams. A good financial planner
can help but it doesn’t guarantee success either. Planners can only advise; our
best advice sometimes goes unheeded.
Some people don’t like
financial “guru” Suze Orman. She shoots from the hip and tells people the raw
truth, which often hurts. I must say that I do like her common-sense
advice. In her book The Money Class: How to Stand in
Your Truth and Create the Future You Deserve
, Orman admits that no
one knows what the stock market will do this year, or next. Not Warren Buffett,
not the best fund manager and not the smartest investment advisor.
Predicting markets is a
During good markets I’ve
had clients tell me I’m brilliant. I’m sure some also think I’m an idiot when
markets are lousy and their investments are doing poorly. I’m neither a genius
nor an idiot. I’m just a guy who knows how to build good portfolios, how to
create a financial plan, how to stay on track, how to minimize taxes and –
perhaps most importantly – and how to avoid the colossal investing mistakes
that destroy retirement dreams. the truth is I have no idea where
the markets are going in the next year or two. I do think I have a pretty good
idea where they’ll be in the next 10 years, which is the period you should be
concerned about. That is, unless you’re within a few years of needing your
money for retirement, or for some other purpose.
“Don’t worry if the market
goes up or down,” Orman says. “Focus on building a diversified portfolio with a
mix of stocks and bonds that will grow in value over the long term. Think
decades, not quarters.”
Investing is important but
Orman says that there are
more important factors to your success than an investment’s rate of return.
“A financial planner can
help you figure out an allocation strategy,” Orman contends, in other words the
proper mix of stocks, bonds and cash to fit your goals. “That said, how much
money you set aside is more important than how you invest it. You need to be
putting away at least 10 to 15 per cent of your salary every year – around 25
per cent if you started saving in your 30s or 40s.”
That requires people to –
wait for it – spend less and take on less debt. Orman writes. “I am going to
challenge you not merely to live within your means, but to live below your
Orman says that income from
your savings plus government benefits
should replace 70 to 80
per cent of your pre-retirement income. If you get a raise, invest half of it.
Actually, I think that some people can manage fine on 50 to 60 per cent of
their pre-retirement income.
The last thing I’ll
highlight from Orman’s fine book is that if you’re not retiring or otherwise
don’t your money in the next 10 years, a stock market decline is actually good
news. You should be cheering for bad markets.
Orman invites you to
imagine that there is a jacket you’ve had your eye and it’s discounted by 25
per cent. “Wouldn’t you be thrilled?” she asks. “You should feel the same way
about stocks. When the price of an investment drops, your dollar buys more
shares—and more shares will earn more money when the markets inevitably go back
She’s saying what I have said many time – that a
market downturn is an opportunity to buy into a rising tide at reduced prices.
Learning this important fact should help you avoid investing mistakes and make
you a more successful investor.
The Rule of 72
Written by Sarah Milton
“Compound Interest is the
eighth wonder of the world.” – Albert Einstein
Einstein described compound
interest as the eighth wonder of the world because he felt that those who
understood it, earned it and those who didn’t, paid it. Compounding is what
makes saving early and saving regularly such a powerful part of building wealth
and it’s also what makes it so hard to get out from under the mountain of
consumer debt that so many of us accumulate. In an nutshell, compound interest
is earning (or paying) interest on interest. When you earn interest at a
compounded rate, your money grows faster because you are earning interest on
your total balance (principle + interest) rather than on the principle alone.
Similarly, when you pay interest at a compounded rate (as you do with credit
cards) your interest charges grow much faster and your debt load gets larger.
We can see the power of compounding in
the table below, which shows how $1000 earning 5% annual interest grows
over time. The first column shows how the $1000 would grow earning 5% simple
interest (earned on just the $1000 principle) and the second column shows
how it would grow earning 5% interest compounded annually (earned on the
principle + interest).
5% SIMPLE INTEREST
5% COMPOUND INTEREST
The Rule of 72
The rule of 72 is a simple
way to estimate how long it will take your money to double in value at a given
interest rate. If you divide 72 by the annual interest rate, the answer is the
number of years it will take to double. For example, 72 divided by 5 is 14.4.
This means that, as you can see in the table above, it takes just under 15
years for $1,000 to become $2,000. 15 years later (in year 30) the money has
doubled again to be just over $4,000 and, 15 years after that (in year 45) it
has doubled again to become more than $8,000. In year 60, it will have doubled
yet again and become $16,000. Using this rule, it’s clear to see that both time
and interest rate are two key factors in building wealth. At 8% interest, your
money will double in 9 years (72 divided by 8 = 9) but it will take 36 years to
double earning 2% interest. For a 20 year old, $100 invested at 7% is worth
$2,100 at age 65. For a 30 year old, that same $100 invested at the same rate
is only worth $1,068 at age 65 and for a 40 year old, $100 invested at 7% is
worth just $543 at age 65. This means that, at 40 years old, even though I’m
only twice the age of the 20 year old, I have to save four times as much each
year in order to achieve the same level of wealth at age 65. It’s a concept
that I wish I had understood as a teenager because I’m pretty sure it would
have motivated me to manage my money differently!
At the end of the day,
saving is always a very personal decision: the choices we make about whether to
save, where to save and how much to save, vary enormously from person to
person. However, all too often, I hear people in their twenties saying that
they’ll wait to save until they’re older because then they’ll be earning more.
When you consider how powerful a factor time is in the wealth building
equation, it just doesn’t make sense (especially when you consider that just
because you’re earning more doesn’t mean you have more discretionary income).
If you can do as much with $25 at 20 as you can do with $50 at 30 or with $100
at 40, it makes sense to start the saving habit early.
Even if you feel like you’ve “missed the boat”
because you should have started saving years ago, remember that whatever you
save today has a greater power to grow than money you save next month, next
year or 3 years from now. We can’t change our past choices but we always have
the power to choose to change our financial future by making different choices