Converting Your Registered Funds to Mortgages
Funding Real Estate Investors
Registered funds, or registered retirement income funds (RRIF) consist of arrangements between you and a particular character, which is generally a trust company, bank or insurance company that has registered with the Canadian Revenue Agency. You can transfer money in from an RPP, RRSP, SPP or from another RRIF. You draw a minimum amount from the carrier each year, starting in the tax year after you enter into the RRIF agreement. The earnings that the fund earns are tax free, but the amounts that you take out (minimum or larger) are all taxable upon receipt.
There is no limit to the number of RRIFs that you can have, and you can set up self-directed RRIFs as well; in that case, the rules that apply are similar to those of RRSPs.
When you turn 71, you have to liquidate your RRSP by the end of that tax year, according to Canadian law. You can accept it all in cash, which will then be taxable, or you can roll the money over into an RRIF. There are several reasons why these are a popular choice, listed below:
Real Estate Investment Funding
1. An RRIF provides for tax sheltered growth; you only pay tax on the amount of your RRSP that you take out. The rest of your investment will continue to grow in a tax shelter as long as you keep your rollover funds in that account.
2. You have control over your income. Instead of having to take the payout all at once, you can determine how often you take out money and how much you take out, so long as you meet the requirement for the minimum withdrawals.
3. When you pass away, you have the option of passing your RRIF assets to your spouse without any tax penalty upon your death.
4. If you feel like your RRIF portfolio is taking on too much risk, you can move the funds over to a more secure form of income at any time. Simply contact your advisor at the registered carrier.
There are several different types of RRIF accounts. A level income RRIF provides a set amount of income over a determined period of time. Let’s say you want to receive consistent amounts of money through age 90 or 95; you set up the RRIF to distribute that amount. You can set this up by time frame or age.
A capital preservation RRIF both preserves your existing capital while paying out fixed income levels on an annual basis. If you are putting mutual funds to use, a target like 8 percent in order to keep your capital level consistent is a reasonable one.
A minimum income RRIF gives you the least amount of money that you can withdraw each year. People who select this option generally do not have a need for the money and want to put off paying taxes on income for as much time as possible. Base the RRIF on the younger spouse’s age, and remember to use the value of the fund on December 31 of the prior tax year.
If you are interested in maximizing your investment returns from your retirement savings but are past the point where you can keep an RRSP, there is an alternative to rolling into the RRIF account choices. If you put your RRIF funds into stocks and mutual funds, you can receive a higher rate of return than what is possible from secure investment options. However, the risk for those investment vehicles is also higher.
Another option involves taking the cashout from your RRSP when you turn 71 and putting it into the real estate market. While your tax burden is larger at age 71, your potential rate of return, when risk is factored in, is often higher if you put your money into real estate.
Here’s how the process works. At Amansad Financial, we have many clients who are looking for private lenders to fund their mortgages. They have 20 or even as much as 30 percent to put down, meaning that the LTV risk on the loan is not as significant. However, they do not have the credit scores that the banks want to see, or they cannot verify income to the satisfaction of the banks. This doesn’t mean that they are insolvent; many people have had financial setbacks that take almost a decade to work their way off their credit reports. Also, other people are self-employed and do quite well, but their income is not the same every month or quarter, and they have no security from an employer, so the banks won’t extend them a loan.
This is a tremendous opportunity for you to make a higher rate of return with the minimal risk of having a borrower go into default. If someone has saved up 20 or 30 percent to put down on a house, it is likely that he has the fiscal discipline to make house payments, even if his credit score is still in repair.
If you looking to invest your registered or non-registered funds in real estate, contact Amansad Financial Services Inc. and allow us to find the right mortgage investment opportunity for you.