Final answer:
RRIFs, like 401(k)s and IRAs, offer tax advantages, allowing individuals to grow their savings without immediate taxation. Traditional IRAs use pretax income for investments, while Roth IRAs use after-tax contributions for tax-free withdrawals at retirement. Retirement plans are portable and susceptible to real rates of return, giving retirees more control.
Step-by-step explanation:
Ricardo is interested in transferring his registered retirement savings plan (RRSP) assets to a registered retirement income fund (RRIF). The RRIF is a type of retirement plan that allows holders to withdraw their savings in a tax-efficient way during their retirement years. Similar to other retirement savings plans such as 401(k)s and Individual Retirement Accounts (IRAs), an RRIF provides certain tax advantages. These plans, including 401(k)s, are tax-deferred, which means that the money invested within them is not subject to tax until it is withdrawn, typically at retirement when the individual might be in a lower tax bracket.
A traditional IRA allows individuals to direct pretax income toward investments that can grow without being taxed on capital gains or dividends until the funds are withdrawn. However, a Roth IRA involves contributions made with after-tax dollars, with the benefit that withdrawals at retirement are not taxed. For both 401(k) and IRA accounts, these tax-deferred features are designed to enhance the return on savings.
What makes plans like 401(k)s and IRAs particularly advantageous is their portability and the potential real rates of return. If an employee changes jobs, their 401(k) plan can move with them, and they are not directly affected by inflation costs due to the real growth of their investments. The shift from traditional pension plans to these defined contribution plans offers a level of flexibility and control over retirement savings that was less common in the past.