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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. 2. Can I contribute into a RIO? 3. When can I start to receive retirement income? 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. 4. What types of Retirement Income Options are available? All Canadians may choose from three different ways of generating retirement income from their RRSPs. There are 3 RIO options available to everybody and 5 more choices only available to some:
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.
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. Minimum Payment, Age less than 71 Minimum Payment, Age 71 to 77 The percentages in the first column below apply to RRIFs first funded before January 1, 1993, and to which:
The second column applies to RRIFs first funded after January 1, 1993, or a previous RRIF that receives funds from either of the above sources after that date. All calculations are based on the total value of the RRIF at the beginning of the year.
Minimum Payment, Age more than 77
Back to Top 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 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.
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. If you are 65 or over in the year, your retirement income qualifies for a Pension Income Credit if you are not already qualified. Also, if both you and your spouse/common-law partner have seperate retirement incomes, this splitting of income may reduce your taxes. Neither RRIF nor annuity payments qualify as earned income. Annuity payments cannot be transferred to an RRSP. RRIF payments in excess of the mandatory minimum payment amount may be transferred DIRECTLY to an RRSP in your name until the end of the calendar year you trun 71. This might enable you to reduce the value of a RRIF to deposit insurance limits. Withholding Tax Income tax may be deducted from the RRIF payments, but not annuity payments. The withholding tax is at the same rates as with direct RRSP withdrawals based on the total amount of all scheduled payments from the RRIF that year that are in excess of the annual minimum amount. The withholding tax applies to the full amount of payment taken from your RRIF in the same calendar yearthe RRIF is opened. Thereafter, it only applies to the portion of a RRIF payment in excess of the mandatory minimum payment amount for the year.
10. When should I convert to RIOs? You should convert your RRSP funds to a form of retirement income if:
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. 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. 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?
A RRIF can be terminated and the full value taken in a lump sum provided the funds are not invested in a non-redeemable term, and the wording of the contract does not prohibit commutation. Commutable annuities can also be purchased. You will have to accept a lower yield on a commutable annuity in exchange for this option. The commuted value of a RRIF can be used, without taxation, to directly purchase an annuity. The commuted value of an RRSP annuity can similarly be used to invest in a RRIF. This flexibility might be valuable should there be further legislative changes in the future affecting RIOs.
If we ever again experience extremely high yields on life annuities, as in 1981, having this flexibility would allow you to convert part or all of your RRIF to the high annuity yield for the rest of your life.
The terminated value of a RRIF in excess of the mandatory minimum payment amount for the year can be transferred directly to an RRSP in your name provided your are not past the year in which you turn 71. This enables you to terminate the mandatory income from a RRIF.
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 occured in 1999.
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. 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). 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.
17. What is a pension income credit? The pension income credit is a federal income tax credit on qualified pension income. In 2005, the credit was 16% of the forst $1000 of qualified pension income. In 2006, it was proposed to be 15.25% of the first $2000 of such income. After 2006, it is proposed to increase to 15.5% of the first $2000 of such income. Provincial income tax rules closely parallel the federal calculation and will save you an additional amount of provincial tax. The total tax reduction depends on your province of residence. Amounts that DO qualify for this credit At any age:
If you are 65 or over in a year, or regardless of age if received as a result of the death of your spouse:
Amounts that DO NOT qualify
Your RRSP deduction is based on your prior year's earned income. The following qualify as earned income:
NOTES:
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. 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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