Saturday, January 19, 2013

Managing Our Own RRIF Payments

In my book Retired at 48 - One Couple's Journey to a Pensionless Retirement, I discuss our strategy for funding our early retirement, using our RRIF, TFSA and non-registered savings as potential sources of income.  The book describes the rules for a RRIF including the formula for calculating the mandated minimum withdrawal per year, and the options for frequency and timing of payment.

Upon retiring last year, I collapsed my RRSP and created a RRIF, from which I will receive monthly payments throughout the year. We will use this money to help fund our retirement expenses.  Receiving income payments monthly gives us the most flexibility and provides a steady cash flow for monthly expenses.  Any excess cash that is not spent within the month can be transferred to a high interest savings account, to save up for major expenses such as vacations, or the TFSA contribution for the following year.

I did the calculation for estimating what the monthly amount would be and took measures to ensure that I would always have enough cash in my RRIF to cover it.  This led me to wonder what would happen to people who did not understand these calculations and did not have enough cash in their RRIF to cover their withdrawal. I spoke at length to a customer service agent from Scotia iTRADE, my online discount brokerage, to verify my understanding of the consequences.  This is what I found happens, at least for iTRADE, but I would assume other brokerage firms have similar policies.

There is no statement sent out at the beginning of the year to indicate what your withdrawal payments would amount to.  If you want to find out or confirm this amount, you need to phone and ask. It is your responsibility to ensure that you have enough cash to cover the amount withdrawn. If you do not, you will go into default for a predetermined amount of time, a grace period of probably a few days, to allow you to cover the shortfall.  If you do not provide enough cash at this point, then the brokerage firm is authorized to arbitrarily sell one or more assets until enough cash is generated.
The assets would be sold in the following order of preference.
  1. Money Market Funds
  2. Stocks
  3. Bonds
You would not be notified or consulted on which assets are sold. This could result in the liquidation of a holding that you preferred to keep and your portfolio might be adversely affected.  It is obviously better to never fall into this situation and to maintain control of your own investments.

I wonder how many people actually know about or understand all this?  Perhaps this is why so many people simply hand their money over to a wealth management firm and let them deal with these matters.  Based on my conversation with the agent, it sounded like going into default in the RRIF happens more often than it should.  There should be more education and awareness about this.


  1. Why would you choose to open a RIF at such an early age as opposed to just using an RRSP, with the RIF you always must withdraw the minimum amount required but with the RRSP you have no minimum. To my way of thinking this gives you way more flexibility than going the RIF route.....I have been retired for over 6yrs with no company pension etc. but I don't think I will be converting my RRSP to a RIF until the required age 71yrs.....maybe I'm missing out on something....just interested in your opinion.


  2. Just so that you understand our income strategy ... We are trying to live off our dividends while preserving our capital for as long as we can. To do so, we need the dividends from all of our sources including our non-registered and registered accounts. We also want to slowly reduce the size of our RRSPs over a long period of time so that by the time we are 71, we are not forced to take large amounts out at the highest tax rate. Instead, we will be able to maintain more of the capital from our non-registered accounts, where our dividends are taxed at a lower rate due to the dividend tax credit.

    If I understand your question, then you are asking why we don't simply withdraw the money that we need from our RRSP without collapsing it into a RIF? This is definitely an option and one that is used by friends of ours. We chose not to go this route for the following reasons:

    1. We take out the minimum amount from each of our RIF to supplement our income. At our age, the minimum is quite low at around 2.5%. By doing so, we do not have to pay withholding tax and so we defer the tax we pay on the money until the following year. If you simply withdraw from an RRSP, you pay withholding tax immediately. I believe you also pay an administration fee to the institution that is managing your RRSP which can be between $25-$125 per withdrawal. Is this correct? If so, then we save on this fee as well.

    2. Having the money come out of the RIF works better for us from an income flow perspective. We have set up our RIF payments so that they are paid to us monthly. I get my payment on the 15th of the month while my husband gets his on the 30th. This means that we are getting income flow into our bank accounts every two weeks, which makes it much easier to have the money available when needed to pay the bills.

    3. After having set up the initial RIF instructions, there is no extra work for us to do to get payments for the next year. It all happens automatically and is handled by our discout broker. We just need to make sure we have the liquid cash in our RIF to support the monthly withdrawals. Luckily, we are generating enough monthly and quarterly dividends to cover our needs until we reach at least 60.

    So far, this is working well for us.

    1. Thank you for the reply, I think you have a very good strategy. I guess we basically do the same thing only I make the withdrawals from my RSP instead of the mandatory RIF withdrawals.....yes we do pay the withholding tax immediately but we do not pay any withdrawal fees and since the withdrawals made over the years have been variable and more sporadic I think the RSP route works best for us, at least for now.

      I now look forward to reading your book which I understand will be delivered any day now, so I may be back with some more questions.

      Cheers and thanks again

    2. If I'm not mistaken by taking funds from an RRIF you and your spouse would be able to claim the $2000 pension income deduction when you do your taxes. I don't think that you can do so if you are withdrawing funds from your RRSP