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 It is your responsibility to ensure that you have enough cash to cover the amount withdrawn.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.
- Money Market Funds
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.