You can read this post to learn about RRIF vs. Annuity: Which One to Choose When Retiring in Canada?
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RRIF vs. Annuity
Like your RRSP, an RRIF is a collection of investments such as bonds or equities. Annuities, on the other hand, are insurance policies that pay you a fixed sum of money annually or monthly for a set period.
If you’re beginning to plan for your retirement, understanding RRIF vs. Annuity is crucial. This page compares the Registered Retirement Income Fund (RRIF) and Registered Life Annuity (RLA). It provides comprehensive knowledge to help you plan your retirement.
Understanding RRIF
An RRIF is a tax-sheltered investment account designed to provide retirement income. It consists of funds transferred from an RRSP (registered retirement savings plan). Your RRSP must be converted to an RRIF by the time you turn 71, although the Canada Revenue Agency allows earlier conversion.
You can set up an RRIF with most financial institutions, including banks and insurance companies. Setting up an RRIF can be done by transferring funds from your current RRSPs to the chosen financial institution.
You have multiple investment options within an RRIF, including equities, mutual funds, GICs, ETFs, and other securities. You will need to make ongoing decisions regarding these investments. Additionally, you can designate a beneficiary for your RRIF account.
RRIF vs. Annuity Overview
| Article | RRIF VS Annuity |
| Country | Canada |
| Further Details | Find Here |
Understanding Annuity
Annuities are offered by life insurance companies and function similarly to pension programs. When a retiree invests their RRSP funds into a payout annuity, the financial institution guarantees annuity payments for life. These payments can be configured to last until age 90 or to provide income for life.
Once you invest in an annuity, you cannot make additional lump-sum withdrawals or changes. However, your investment is protected from interest rate or market volatility. Options include a combined life annuity for a married couple or a single life annuity for an individual.
Annuities eliminate the uncertainty of converting your retirement funds into a consistent monthly income stream. You no longer need to decide how to allocate your retirement assets, and stock market volatility is not a concern.
Comparing RRIF and Annuity
Both RRIFs and annuities have their pros and cons in a retirement plan. An RRIF offers flexible and potentially profitable long-term investing opportunities but also exposes you to investment risks, resulting in possible gains or losses.
An annuity provides the certainty of a fixed regular income but limits your financial freedom. Both RRIF withdrawals and annuity income are taxed similarly on your tax return.
Although RRIFs are taxable, annuities are not; payments stop when there’s no longer a guarantee term. An RRIF can be tax-free transferred to your surviving spouse upon your death; if your spouse passes away second, the amount is added to the estate’s income for that year and becomes taxable.
Which One to Choose When Retiring in Canada?
Most Canadians choose an RRIF over an annuity for their RRSP savings. Use the following guidelines to decide between an annuity and an RRIF:
- Choose an RRIF for greater flexibility.
- Prefer an RRIF if you have a higher tolerance for investment risk.
- Opt for an RRIF if you have other annuity/pension income sources besides CPP or OAS.
- Consider an RRIF if you expect a shorter lifespan.
- Lean towards an RRIF if you want to leave money for your spouse or other beneficiaries.
An insurance firm or bank can acquire an RRIF, but only a licensed life insurance representative acting on behalf of a Canadian Life Insurance firm can purchase a registered life annuity.
We are delighted you joined us in reading this post on RRIF vs. Annuity. We hope it helps you make an informed decision.