RRSP Maturity Options: What you Need to Know

If you are turning 71 this year  (born in 1952), you must convert your RRSP to an income plan by the end of 2023. It should be noted that you can convert your RRSP to an income plan at any age prior to 71.

KEY TAKEAWAYS:

• We will review the three income options.
• We will review how the RRIF minimum annual payments are calculated.
• The advantage of basing the RRIF payment on the younger spouse/CLP (common-law partner). 
• The options when naming your spouse/CLP as a beneficiary.
• How to plan for taxes.

 

The three income options to create an income from your RRSP are:

1. Cashing in your RRSP.
2. Purchasing an annuity with your RRSP funds.
3. Converting your RRSPs into a Registered Retirement Income Fund (RRIF).

 

CASHING IN YOUR RRSP

You can withdraw the entire RRSP as cash. This option is not generally recommended because the government will tax the whole amount of RRSP as income for the year you cash it in.  

ANNUITY

You can purchase an annuity with your RRSP. With an annuity:

• Typically, you are buying an annuity from a Life Insurance company. They will guarantee you an income for a set period. 
• This income is taxable, and the number of payments you receive would be determined by several factors, including the value of capital used to purchase the annuity, current interest rates, age, health, and the payment features you select.

 

The two most common types of annuities are:

1. Single Life Annuity: The income payments are guaranteed for your life only.
2. Joint life and last survivor annuity: The income payments are guaranteed for your life and continue to your spouse/CLP after your death.  

 

Among the features, you could select is a guaranteed death benefit to your estate and the annual indexing of payments. The more features you choose, the lower the income the annuity provides.

 

The main advantages of an annuity are: 

• You have no more investment decisions to make.
• You can be sure of what your income will be. 
• The annuity provider assumes all the investment risk. 
• You will not outlive your income.

 

The main disadvantages are:

• You lose access to your capital. 
• You lose flexibility in the event your needs change.
• The decision is irreversible.

 

CONVERT TO A REGISTERED RETIREMENT INCOME FUND (RRIF)

A Registered Retirement Income Fund (RRIF) is almost the opposite of an RRSP. With an RRIF, you must withdraw a minimum amount of capital each year instead of contributing to the plan.

Setting up an RRIF consists of completing an RRIF application form and transferring your RRSP tax-free to the new plan. If you turn 71 this year, this must be done by the year’s end, and you must start to take an income the following year.

• The minimum annual withdrawal is based on the market value of the RRIF as of December 31^st and your age.  
• If your spouse/CLP is younger than you, you can base the minimum RRIF payments on their age, resulting in a lower minimum payment.
• The payments made to you are taxable, but the investments within the RRIF continue to grow tax-free. 
• You have flexibility as you can withdraw as much as you want over the minimum annual payment each year.

 

WHAT IS THE RRIF MINIMUM ANNUAL PAYMENT? 

Under the age of 71, the below calculation applies.

The calculation for the minimum RRIF factor under the age of 71 is as follows:

• One divided by (90 minus your age as of January 1^st of the current year).
• This is multiplied by the plan’s value as of December 31st of the prior year to determine the RRIF minimum payment.

 

Over the age of 70, the following schedule applies:

Age on January 1st	Minimum Annual Payment %
71	5.28%
72	5.40%
73	5.53%
74	5.67%
75	5.82%
76	5.98%
77	6.17%
78	6.36%
79	6.58%
80	6.82%
81	7.08%
82	7.38%
83	7.71%
84	8.08%
85	8.51%
86	8.99%
87	9.55%
88	10.21%
89	10.99%
90	11.92%
91	13.06%
92	14.49%
93	16.34%
94	18.79%
95 and over	20.00%

HOW TO CHOOSE A BENEFICIARY  FOR YOUR  RRIF

When an individual dies, any remaining assets in an RRIF are taxed as income in the year of death. However, if you name a “qualified beneficiary,” the proceeds can roll over tax-free to them.  

Qualified Beneficiary:

1. Your Spouse/CLP.
2. A financially dependent child or grandchild under the age of 18.
3. A financially dependent child or grandchild who’s dependent because of physical or mental infirmity.

 

You have two options to name your spouse/CLP:

• Beneficiary

• With this designation, the RRIF is collapsed and transferred to their RRIF or RRSP.

• Successor annuitant
  • With this designation, the ownership transfers and the plan and payments continue as set up.

 

You will want to review the best option based on your income strategy for your family.

If you do not have a spouse or common-law partner:

If you do not have a spouse/CLP, you can still name a beneficiary for the RRIF assets. The RRIF will be taxable to the estate. However, the RRIF assets will avoid probate fees. This strategy should be considered with your entire estate plan.

INCOME PAYMENTS

Your payments can be set up monthly, quarterly, or annually, depending on your cash flow requirements. Many people like a monthly payment as it is like a monthly paycheque.

TAXES ON RRIF INCOME

The income from the RRIF is 100% taxable as ordinary income. You will want to plan for the income tax owed ahead of time.

Set Up Withholding Taxes

If you only take the RRIF minimum as income, no income tax is withheld on the payments. For payments above the minimum, tax is withheld automatically as follows:

The amount withdrawn is more than the minimum	All provinces except Quebec (%)	Quebec (%)
Up to $5,000	10%	20%
$5,001 to $15,000	20%	25%
Over $15,000	30%	30%

You can specify a withholding tax amount with the plan.

If you don’t want a large tax bill in April, you can set a specific withholding tax percentage/amount on the payments based on your projected income.

INVESTMENT OPTIONS IN A RRIF

Generally, you can hold the same investments in a RRIF that you had in your RRSP.  

OVERALL PLAN

The decision on when and how to convert your RRSP to an income plan should be based on your overall retirement and cash flow strategy. You will need to review the following:

• Options for your RRSP; cash it in, buy an annuity, or convert to a RRIF and combination.
• How much you must withdraw annually.
• Should you base the income on your spouse’s/CLP’s age?
• Whom to name as beneficiary.
• How to plan for taxes. 

 

Download our White Paper: Your Retirement Road Map: How to make the Transition to Retirement HERE.  

For more information, refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®.

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