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Investing & Retirement - RIOs

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What is a Registered Income Option (RIO)?
Can I contribute into a RIO?
When can I start to receive retirement income?
What types of Retirement Income Options are available?
Why choose a RRIF?
What is my mandatory minimum payment amount for my RRIF?
Why would I consider electing to base my RRIF on my spouse's/common-law partner's birthdate?
What type of payment plans are available?
Is retirement income taxable?
When should I convert to RIOs?
What types of investment choices are available?
What questions should I ask before investing?
Are there any risks involved?
Can I terminate my Retirement Income Options?
What happens in case of death?
Who sells RIOs?
What is a pension income credit?
What is earned income?
What is the definition of a Spouse or Common-law Partner?
Who is the beneficiary?

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1. What is a Registered Income Option (RIO)?

When your ready to convert your savings to income, you're dealing with a Retirement Income Option, or "RIO". A RIO is a financial product which becomes your own personal pension plan. The money to purchase your RIO comes from the funds accumulated in your Registered Retirement Savings Plan (RRSP), your Registered Pension Plan (RPP), your Deferred Profit Sharing Plan (DPSP), or any combination of these.

Regular contributions to an RRSP will result in a substantial accumulation of savings. When you desire income, you can invest your savings in one or more of three retirement options. You can have any number of each option.

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2. Can I contribute into a RIO?

You cannot contribute directly to a RIO. Funds can be transferred from an RRSP, another RROF, a Registered Pension Plan, a Deferred Profit Sharing Plan, or a commuted RRSP annuity.

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3. When can I start to receive retirement income?

There is no longer any minimum required age for setting up an RRIF, except with most Locked-In RRSPs and LIRAs. However, most people wait until they are retired and need an income because once an RRIF has been established, you are required to withdraw the minimum amount every year.

You must purchase your Retirement Income Option, before the end of the calendar year in which you turn 71. You can make a contribution to your RRSP for that year as long as you contribute by December 31.

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4. What types of Retirement Income Options are available?

All Canadians may choose from various different ways of generating retirement income from their RRSPs. Since these options can be complicating to some, it is best to speak with a financial expert. Contact an OMISTA expert for advice on which RRIF option is best for you.

5. Why choose a RRIF?

RRIFs are a very flexible retirement option. They offer an income that increases with inflation, providing tax sheltered growth and opportunity to "tailor make" your investment portfolio to meet your individual lifestyle needs. RRIFs also provide flexibility for your spouse or common-law partner to transfer funds tax-free to her/his retirement savings plan upon your death.

A RRIF gives you freedom to choose both the amount of income you will receive in any year and how the remaining balance will be invested.

Competitive rates to assist in maximizing your return

Ideal for bridging income needs after early retirement

Transferable between deposit-taking financial institutions

Minimum payment amount may be calculated on younger spouse's age

6. What is my mandatory minimum payment amount for my RRIF?

You don't have to take any payment from a RRIF in the calendar year it is first funded. In subsequent years there is a mandatory minimum payment amount which changes annually based on your age (or your spouse's age if you have elected) and the total value of the RRIF at the beginning of the year.

7. Why would I consider electing to base my RRIF on my spouse's/common-law partner's birthdate?

You can elect to base your RRIF on your spouse's/common-law partner's birthdate. You must make this election at the time you apply for your RRIF.

If you choose the age of a younger spouse, your minimum payment will be lower.
If you select the age of an older spouse, your minimum payment will be higher without triggering withholding tax at source.
If both RRIFs are based on the same birth date, when one spouse passes away, the survivor can combine the two or more RRIFs into one RRIF, rather than having to continue with separate RRIFs.

If you didn't make this election when you applied for your RRIF, or you marry into a common-law partnership later, you can transfer your RRIF to a new RRIF based on your spouse's age.

8. What type of payment plans are available?

You can choose any payment level, as long as the total each year is at least equal to the mandatory minimum amount. There is no maximum payment level. With many RRIFs you can fluctuate your payments up or down above the minimum from year to year. Obviously the higher the payments you take, the sooner the funds will be depleted. Contact an OMISTA expert for advice on which RRIF payment plan is best for you.

9. Is retirement income taxable?

There is no tax consequence when transferring your RRSP funds to a retirement income option. You only report, for tax purposes, the resulting payments as received. Since the income is spread over your retirement years, so is the tax liability.

10. When should I convert to RIOs?

You should convert your RRSP funds to a form of retirement income if:

you need more cash in regular periodic payments, or
you are 65 or over in the year and need the qualification for the Pension Income Credit, or
you will pay a reasonable rate of tax on the income now, but may be in a higher tax bracket or subject to the Old Age Security clawback in later years.

The best time to purchase annuities is when interest rates are at the peak of a cycle.

*The mandatory minimum payment from a RRIF cannot be sheltered from taxation. Therefore, you should take into consideration that purchasing a RRIF before the mandatory conversion age will increase your taxable income.

11. What types of investment choices are available?

Not all RIO plans are the same, each issuer offers one or more ways to invest your money, and the growth rates, terms, conditions and fees vary. Because of the wide variety and the fact that the available yields change frequently, it is wise to obtain the help of a financial expert before selecting your retirement income option(s). The selection of a retirement income option depends entirely on your personal situation (health, present income and tax brackets, cash requirements, desired inflation protection or estate preservation etc,). You may often select more than one of the options to create your retirement income package.

We would be happy to provide financial guidance. You can meet with our investment experts at any of our three branches or, our Credential Financial Strategies Inc. Representative, Investment Specialist, Ozzie MacKay.

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12. What questions should I ask before investing?

Ask about fees, deposit insurance protection and estate preservation on any RRIF before you invest. RRIFs are fully transferable between issuers.

13. Are there any risks involved?

The RRIF and TCA 90 are designed to repay the full investment and all earnings to you or your beneficiaries. If your RRIF is invested in mutual funds or equities, you have the risk of losses.

With a life annuity, there is a risk that all of your capital and its earnings may not be repaid to you by the time payments cease on your death. Purchase of a guaranteed period can eliminate this risk.

In most provinces your investment in a Credit Union, bank or trust company RRIF or TA 90 will be covered by the same deposit insurance fund that covers RRSP deposits.

Most life insurance companies are members of a consumer protection plan which is intended to safeguard their RRIFs, or the life annuity income, should a life insurance company fail to meet its obligations.

14. Can I terminate my Retirement Income Options?

Because not all plans have the same restrictions, it is best to speak with a financial expert.

We would be happy to provide financial guidance. You can meet with our investment experts at any of our three branches or, our Credential Financial Strategies Inc. Representative, Investment Specialist, Ozzie MacKay.

15. What happens in case of death?

With a life annuity with no guarantee, the payments cease upon death. If you purchase a TCA 90 and you die before age 90, or if you die within the guaranteed period of a single life annuity, payments can continue to your spouse/common-law partner for the remainder of the guaranteed payment period, or until his or her death.

With a RRIF or Variable Benefit Account, your spouse, if named on the plan, can take your place without tax consequence and make his or her own decision on the income and payout term, or can transfer the balance to another eligible plan.

If your estate or someone other than a spouse or dependent child or grandchild is the beneficiary, the remaining value at that time (with a life annuity this is the discounted cash value of the remaining guaranteed payments), will be paid in a lump sum to the estate or beneficiaries. This lump sum is taxable on your final tax return.

If your beneficiary is a physically or mentally handicapped child or grandchild who was financially dependent on you, part or all of the remaining value can be transferred, without taxation, to an RRSP, RRIF or annuity in the child's or grandchild's name, or taxed in his or her name. If the beneficiary is an able-bodied child or grandchild under 18 who was financially dependent on you, part or all of the remaining value can be transferred, without taxation, to a Term Annuity to Age 18, with annuity payments taxed in the child's name over that period.

If a charity is the designated beneficiary of the RRIF in the plan or Will, the charitable donations tax credit can be extended to the estate. The extension is retroactive to deaths that occurred in 1999.

16. Who sells RIOs?

Credit Unions, trust companies, life insurance, mutual fund companies, banks and investment dealers all sell RIOs and TCA 90s. Only life insurance companies offer life annuities, although they can be arranged through most insurance agencies.

We would be happy to provide financial guidance. You can meet with our investment professionals at any of our three branches or, your Credential Financial Strategies Inc. Representative, Investment Specialist, Ozzie MacKay.

You can also click here to access our on-line financial planning tool.

17. What is a pension income credit?

The pension income credit is a federal income tax credit on qualified pension income.

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18. What is earned income?

Your RRSP deduction is based on your prior year's earned income. The following qualify as earned income:

salary, wages, bonuses and taxable fringe benefits (minus union or professional dues and employment expenses claimed as deductions)
taxable wage loss replacement or long term disability income resulting from employment
Canada pension plan disability benefits
net income from self-employment (minus current year business losses)
net rental income from real estate (minus current year rental losses)
taxable alimony or maintenance payments received
royalties of an author or inventor
net research grants

NOTES:

Earned income must be reduced by deductible alimony or maintenance payments.
Interest, dividend, capital gains income, and E.I. benefits, do not qualify as earned income.
Income in which is not taxed, such as Workers' Compensation and welfare benefits, cannot be used as earned income.

19. What is the definition of a Spouse or Common-law Partner?

As of 2001, income tax legislation defines the term "spouse" to be a person of the opposite sex who is party to a legal marriage. As well, the term "common-law partner" has been introduced and is defined as two persons, regardless of sex, who cohabit in a conjugal relationship and who have cohabited throughout the 12 month period that ends at that time. This period can be less than 12 months if both partners are the natural or adoptive parents of the same child, or if one common-law partner has a child who is wholly dependent on the other for support and over whom the other has custody. The term "common-law partner" does not apply if at the particular time the individuals were seperated for 90 days or more dues to a breakdown of the conjugal relationship.

20. Who is the Named Beneficiary?

The named beneficiary is individual who is eligible to receive the Retirement Income Payments from the plan in the event of your death.

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Credential Financial Strategies Inc. is a member company under Credential Financial Inc., offering financial planning, life insurance and investments to members of credit unions and their communities. Credential® is a registered mark owned by Credential Financial Inc. and is used under licence.

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