As mentioned in question C3, there are basically three ways you can take money out of your RRSP. First, you can collapse all or part of your RRSP. Any amounts withdrawn will be fully taxable to you in the year of withdrawal. Your RRSP issuer will withhold tax on your withdrawal (the withholding tax rate varies with the size of the withdrawal).
You can also purchase an annuity or a RRIF with your RRSP. Generally, you would do this when you want to receive retirement income from your RRSP. Withdrawals from an annuity or a RRIF will be taxable only when received by you.
An annuity is a right to receive periodic payments of income, either for life or for a fixed number of years. Several types of annuity products are available, such as annuities which will continue to pay income until the later of your death or the death of your spouse. The size of your periodic payment will depend on the length of the annuity term — the longer the term of your annuity, the smaller the payment.
You can use your RRSP to buy an annuity, usually from a life insurance company, to give you a stream of income in your retirement. This income will be fully taxable to you when you receive it as pension income.
The advantage of an annuity is that it gives you a guaranteed stream of income for the annuity term. In exchange for this income stream, you will, in effect, give up the control of your investments to the issuer of the annuity. Also, your purchasing power will be at risk for inflation unless the annuity has inflation adjustments.
A RRIF is like an RRSP with two main exceptions. The first difference is that, except for certain transfers, contributions cannot be made to a RRIF. Secondly, a minimum amount must be withdrawn from the plan each year. Your RRIF can hold the same investments as your RRSP. As well, you can have a self-directed RRIF in the same manner as your self-directed RRSP.
A minimum percentage must be withdrawn each year, depending on your age. The percentage is applied to the fair market value of plan assets as of January 1 of each year to determine the dollar amount of the mandatory withdrawal for that year. More than the minimum can be withdrawn, if so desired.
Another option for calculating minimum RRIF withdrawals is to use your spouse's age in place of your own, even if their age is less than 71. This option is for purposes of determining the minimum withdrawal amount only and does not apply for other purposes such as determining when your RRSP matures. This alternative does allow you to defer the taxation of plan assets to the extent that your spouse is younger than you.
The main advantage of a RRIF over an annuity is that you maintain control over your investments. With that, however, comes the risk that your investments will not perform to your expectations.