Module 13: UNIT 1 Registered Retirement Income Funds

Question 1

Introduction

Answer 1

• Used to extend savings specifically setting funds aside that would pay for their retirement years

Question 2

Establishing a RRIF

Answer 2

The establishment of a RRIF begins with the transfer of funds from another registered vehicle; property can be transferred from:

• An RRSP
• Another RRIF
• A registered pension plan

The CRA refers to the owner of a RRIF as an “annuitant”, and there is no limit to the number of RRIFs an individual may own

Using a RRIF, it is possible to establish a perpetual income from a RRIF over an individual’s remaining lifetime or that of his spouse

• owned by an individual, cannot be owned by a corporation or employer
• May be established at any time
• There is a minimum amount to withdraw, but no maximum

Question 3

Establishing an RRIF: Transfer From An RRSP

Answer 3

There are several ways in which the transfer from an RRSP may occur:

A transfer may occur from a “matured RRSP” to a RRIF where the annuitant of the RRSP is the same as the annuitant of the RRIF, and the payment is a direct transfer of a commutation payment from the RRSP annuity

A transfer may occur from an “unmatured RRSP” to a RRIF where the annuitant of the RRSP is the same as the annuitant of the RRIF

A transfer may occur from an “unmatured RRSP” to a RRIF where the annuitant of the RRSP is the current or former spouse or common-law partner of the RRIF annuitant

A transfer of assets into a RRIF may occur from a refund of premiums

Question 4

Establishing an RRIF: Transfer From An RRIF

Answer 4

There are several ways in which the funds can be transferred between RRIF:

A transfer may occur from one RRIF to another RRIF where the annuitant is the same under each of the two RRIFs

A transfer may occur between two RRIFs where the annuitant of the transferring RRIF is the current or former spouse or common-law partner of the receiving RRIF

A transfer of assets into a RRIF may occur from funds labeled as a designated benefit

Question 5

Establishing an RRIF: Transfer From An RPP

Answer 5

Registered pension plan assets are normally transferred to locked-in registered plans; however, lump-sum amounts may be transferred to a RRIF depending on the provisions of the registered pension plan

Question 6

Types of RRIF

Answer 6

• The Act establishes a prescribed schedule of minimum payments that must be made from a RRIF, beginning the year after a RRIF is established
• The prescribed schedule of payments from a RRIF is based on two different types of RRIFs: a qualifying RRIF and a non-qualifying RRIF

Qualifying RRIF

• One that was purchased before January 1, 1993, to which no property has been transferred after 1992
• to which property has been transferred after 1992

Non-Qualifying RRIF

A non-qualifying RRIF is one that was established after December 31, 1992; or, a RRIF that was originally established prior to 1993

Question 7

Minimum Withdrawal Calculation

Answer 7

When a RRIF is first established, the annuitant has the option of electing to have the annual minimum withdrawal calculation based on either his age or the age of his spouse

The calculation of the minimum withdrawal for a specific year utilizes two key pieces of information:

• The market value of assets in the plan as of January 1 of that year
• The age of the annuitant as of January 1 of that year (or the age of the annuitant’s spouse or common-law partner if this election was made)

Question 8

Minimum Withdrawal Calculation: Minimum payment Canculation (Qualifying RRIF)

Answer 8

Minimum Payment Calculation for a Qualifying RRIF
-If the RRIF annuitant is under age 79 as of January 1, the minimum payment calculation for that year is:

Minimum payment = (Market value of plan assets on January 1) / (90 – age*)

-If the RRIF annuitant is age 79 or older as of January 1, the minimum payment calculation for that year is:

Minimum payment = (Market value of plan assets on January 1) X (CRA age* factor

• Age refers to the age of the annuitant as of January 1 (or the age of the annuitant’s spouse or common-law partner if this election was made).

Question 9

Minimum Withdrawal Calculation: Minimum payment Canculation (Non- Qualifying RRIF)

Answer 9

Minimum Payment Calculation for a Non-Qualifying RRIF

• If the RRIF annuitant is under age 71 as of January 1, the minimum payment calculation for that year is:

Minimum payment = (Market value of plan assets on January 1) / (90 – age*)

• If the RRIF annuitant is age 71 or older as of January 1, the minimum payment calculation for that year is:

Minimum payment = (Market value of plan assets on January 1) X (CRA age* factor)

*Age refers to the age of the annuitant as of January 1 (or the age of the annuitant’s spouse or common-law partner if this election was made).

Question 10

Qualifying and Non-Qualifying Plan Issues

Answer 10

A qualifying RRIF has a lower minimum calculation for annual payments for ages 71 through age 77 than a non-qualifying RRIF

• When transferring money from an RRSP to a RRIF or between RRIFs, care should be taken to preserve the status of a qualifying RRIF
• When transferring a RRIF between institutions, the relinquishing trustee must state whether the RRIF is a qualifying or non-qualifying RRIF and is required to pay out the remaining minimum amount
• If property from a non-qualifying RRIF, or from an RRSP, is transferred to a qualifying RRIF, the RRIF becomes a non-qualifying RRIF where the minimum prescribed payment is re-calculated based on non-qualifying RRIF rules
• If property from a qualifying RRIF is moved from one financial institution to another, the plan continues to be classified as a qualifying RRIF for minimum payout calculations

Question 11

Withdrawals From an RRIF: Ongoing Withdrawal by Annuitant

Answer 11

Minimum withdrawals must be made from a RRIF each year, and a withdrawal based on only the minimum amount is not subject to withholding tax

Question 12

Withdrawals From an RRIF: Frequency

Answer 12

Payments from a RRIF must be regular, and as long as the minimum income requirement is satisfied, an individual may withdraw as much as he wishes from the RRIF at any time

-

Question 13

Withdrawals From an RRIF: Excess amounts

Answer 13

Common choices for designing an income flow from the RRIF are:

• minimum income,
• interest only,
• a level income (i.e., $500 per month)

Question 14

Withdrawals From an RRIF: Transferring Assets

Answer 14

When assets of a RRIF are transferred from one RRIF to another, the relinquishing institution must pay out the minimum amount

Care should be taken in planning for such transfers, with particular attention to the payment schedules associated with the old and new RRIF and the actual amount of assets that will be transferred; while the old institution must complete the minimum payment for that year, the new institution could begin payments, if requested by the annuitant, but the annuitant would have to select a specific dollar amount or percentage because the minimum is not an option

Question 15

Spousal RRIF: Criteria

Answer 15

• A “spousal RRIF” is established with assets transferred from a spousal RRSP or from another spousal RRIF
• The benefit of is to potentially reduce income tax payable on retirement income by splitting assets used to provide future income

Question 16

Spousal RRIF: Income Attribution

Answer 16

• The CRA recognizes that income splitting creates tax advantages and has implemented “attribution rules” to prevent abuse, also know as the “current plus two year” rule
• Attribution may arise when the annuitant withdraws an amount from a spousal RRIF that is in excess of the minimum amount, and is the lesser of: the excess RRIF withdrawal; and contributions made to the spousal RRSP in the current or previous two taxation years that have not already been attributed

Question 17

Investments

Answer 17

Assets accumulate tax free in an RRSP and continue to accumulate tax free when transferred to a RRIF

Similar to a self-directed RRSP, a self-directed RRIF allows the annuitant to hold a variety of qualified investments under one RRIF umbrella

Question 18

Investments: Qualified Investments

Answer 18

The general rules for RRIF investments are in essence the same as for RRSPs

Question 19

Investments: Non-Qualified Investments

Answer 19

• Shares of private corporations, where the RRIF annuitant and his or her immediate family hold more than 10 per cent of any class of shares
• Commodity futures
• Listed personal property, such as works of art and antiques
• Gems and other precious stones

When an RRIF acquires a non-qualified investment, it results in three consequences:

• FMV of non-qualified investment at time of investment included in annuitant’s income
• The RRIF trust is subject to a 1% penalty on the FMV of the non-qualified investment
• The RRIF trust is subject to income tax on the investment income earned on the non-qualifying investment

Question 20

Transfers Out of RRIF

Answer 20

RRIF to a RRIF

RRIF to an RRSP
- All property from a RRIF cannot be transferred directly to an RRSP, but the excess amount from a RRIF can be transferred, provided that the transfer occurs directly between the plans

RRIF to a Qualified Annuity
- All property from a RRIF cannot be transferred directly to a qualified annuity, but the excess amount from a RRIF can be transferred

Question 21

Income Tax Implication: Regular RRIF

Answer 21

All payments out of a regular RRIF are fully taxable as income to the RRIF annuitant

Minimum payments from the RRIF do not attract withholding tax; however, the payments are fully taxable in the year received and must be included as income for the recipient

Question 22

Income Tax Implication: Pension Income tax Credit

Answer 22

Payments from a RRIF qualify as eligible pension income for the Pension Income tax credit

-Eligible for pension splitting between spouses

Question 23

Income Tax Implications: Death of the RRIF Annuitant - General Terms

Answer 23

Upon the death of the annuitant, if the assets of the RRIF pass to someone other than a spouse/common-law partner or a qualified child or grandchild, the fair market value of the plan’s assets, immediately before death, must be included in the annuitant’s income for the year of death

Question 24

Income Tax Implications: Death of the RRIF Annuitant - Designated Benefit

Answer 24

A “designated benefit” is defined as any amount paid out of a RRIF to the spouse or common-law partner of the deceased annuitant; or an amount paid to a financially dependent child or grandchild of the deceased annuitant

• Spouse or Common-Law Partner
  Financially Dependent Child - Grandchild Financially Dependent Child
• Grandchild (Disabled)

Question 25

Beneficiary Designation

Answer 25

There are two types of beneficiary designations: revocable and irrevocable - A “Revocable Beneficiary” designation may be changed by the owner of the plan at any time and allows the owner to make any desired changes to the plan - An “irrevocable designation” prevents the owner of the plan from changing the beneficiary designation without the consent of the irrevocable beneficiary Individuals should seek professional advice to assess the effectiveness of a beneficiary designation under the laws applicable in their province

Question 26

Relationship Breakdown

Answer 26

Payments must be transferred directly from the existing plan to the spouse or common-law partner's plan SEE PAGE 13-26

Question 27

Selection of an RRIF

Answer 27

The selection of a RRIF as a retirement income vehicle brings with it considerations that must be carefully analyzed relative to the facts of a retiree's particular situation SEE PAGE 13-27