Retirement doesn’t require selling every investment and moving the proceeds into a chequing account. A Registered Retirement Income Fund (RRIF) can keep eligible investments sheltered while paying money out.
The important change from a Registered Retirement Savings Plan (RRSP) is the withdrawal requirement. Once the RRIF’s minimum payments begin, the account has to distribute money each year, whether the stock market has been cooperative or not.
Source: Getty Images
What changes
An RRSP must mature by the end of the year you turn 71. Common choices include transferring it directly to an RRIF or purchasing an eligible annuity. A normal cash withdrawal instead generally creates taxable income. A direct RRSP-to-RRIF transfer doesn’t trigger the same immediate withdrawal tax. You can keep eligible stocks and other investments in the new account. The RRIF’s withdrawals are generally taxable when paid out.
There’s no required minimum in the year the RRIF is established. Minimum payments start the following year and are based on the account value at the start of the year and the applicable age factor. For a $300,000 RRIF and an age of 72 at the beginning of the year, the 5.4% factor produces a $16,200 minimum payment. That’s $1,350 as a monthly average before tax, although the withdrawal schedule can vary.
If the minimum is based on an eligible election using a younger spouse aged 65, the 4% factor produces $12,000 instead. The $4,200 difference leaves more money sheltered for now. But could you grow it even further?
NA
National Bank of Canada (TSX: NA) illustrates why an RRIF is an account, not a requirement to abandon equities. Its banking, wealth-management, and financial-markets businesses can generate dividends and long-term growth within the portfolio.
National Bank reported fiscal third-quarter adjusted earnings of $3.39 per share. The declared $1.32 quarterly dividend used about 39% of that figure. Its Canadian Western Bank acquisition also broadens its domestic presence beyond its Quebec roots.
At a recent price of $198.06, a $30,000 budget bought 151 shares for $29,907.06. The annualized $5.28 dividend generated $797.28, or $66.44 as a monthly average, with actual payments quarterly. That supports part of the RRIF’s cash needs. It clearly doesn’t fund our $16,200 minimum by itself. Even a fully invested $300,000 portfolio yielding 3% would generate $9,000, leaving $7,200 to come from cash or planned sales.
Considerations
At writing, National Bank traded at about 14.6 times earnings. This isn’t a full-year forecast, but the covered dividend and broader franchise support a measured position within a diversified account. Credit losses, acquisition integration, and financial-market revenue remain risks. Holding enough cash for upcoming payments reduces the chance that a temporary stock decline dictates which shares must be sold.
Taking the minimum doesn’t mean no tax is owed. Institutions generally don’t have to withhold tax on the minimum portion, but that income still enters the tax return. Extra withdrawals have separate withholding requirements. Money withdrawn that isn’t needed for spending can potentially be invested in an eligible Tax-Free Savings Account (TFSA) when room is available. The RRIF withdrawal remains taxable even if the after-tax proceeds go into a TFSA.
The payment requirement doesn’t force spending everything withdrawn either. Some retirees need the cash for living costs, while others may reinvest after tax. The important distinction is that the money must leave the RRIF under its rules, even if it continues serving a long-term savings goal elsewhere.
Bottom line
An RRIF turns retirement savings into required annual withdrawals while allowing investments to remain sheltered inside the account. National Bank can continue providing income, but dividends alone don’t have to match the minimum. A planned combination of income, cash, and sensible sales is more useful than building the whole portfolio around the highest yield.
