The benefits of holding your GICs in RIFs

We spend much of our adult lives saving for retirement, but few of us think about what to do when we finally retire.

Throughout our working lives, we save by contributing towards investment vehicles such as Registered Retirement Savings Plans (RRSPs), which are attractive because you can save on taxes in the process. But once you retire – or when you turn 71, whatever comes first – you will have to convert your RRSPs to income funds. 

As retirement approaches, you might be wondering how you can maximize your savings in your post-work life. When it comes to the conversion of your retirement savings, you have a few options. You could cash out your RRSPs and pay the appropriate taxes on them, or you can convert them into either Retirement Income Funds (RIFs) or annuities. But what are the differences between these two fund types? 

Annuities and RIFs: The pros and cons 

Annuities are funds that are similar to an insurance policy – they provide you with a set amount of money either monthly or annually for a prescribed period. You may purchase an annuity for $150,000 upon retirement. Normally, the amount you receive regularly is based on your age at the time of purchase and you can choose to have payments for a fixed period or the rest of your lifetime.

You can also choose to purchase an annuity with a spouse or someone else, and you can choose which features you would like to go with it – for example, you can choose to have your annuity pay your family members when both you and your spouse pass away. Often, the cost of the annuity will go up with additional terms. 

With an RIF on the other hand, the money you transfer stays in a tax-sheltered account, and you can continue to earn tax-deferred income, similar to your RRSP. You can choose to have a manager direct your RIF or you can self-direct the funds.

You don’t get a regular payment from your RIF, but you do have to take regular minimum payments based on a calculation that is determined by your age at the time of purchase. You have the option of taking additional funds whenever you like, but of course tax is charged in the year money is withdrawn from the fund.  

Annuities vs. RIF: Which is right for you?

RIFs provide retirees with a good deal more freedom than annuity funds. You can choose the amount you want to withdraw when, and you can also leave your savings in the RIF to allow them to continue to grow. Also, your money remains protected by the Canada Deposit Insurance Corporation (CDIC) up to a certain amount when you invest with a member banking institution. 

Annuities likely make more sense for those who are on a fixed income, possibly with fewer other savings or assets to rely on. You are paying tax on whatever income you receive from annuities or RIFs in the year you receive it, so the flexibility of RIFs may make more sense for those with other assets. Many investors like to combine these two tools to get the best of both worlds.