If you are turning 71 (born in 1950) by the end of 2021, you can no longer have an RRSP, and it must be converted to an income plan. It should be noted that you can convert your RRSP to an income plan at any age.
- 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 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 simply withdraw the entire RRSP as cash. This option is not normally recommended because the government will tax the entire amount of RRSP as income in the year that you cash it in.
You can purchase an annuity with your RRSP. Typically, you purchase 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, your age, health, and the payment features you select.
The two most common types of annuities are:
- Single Life Annuity. The income payments are guaranteed for your life only.
- 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 provided by the annuity.
The main advantages to an annuity are:
- you have no more investment decisions to make.
- you can be certain 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 income based on today’s interest rates may not be enough to meet your future needs.
CONVERT TO A REGISTERED RETIREMENT INCOME FUND (RRIF)
A Registered Retirement Income Fund (RRIF) is almost the opposite of an RRSP. With a RRIF, instead of making contributions to the plan, you must withdraw a minimum amount of capital each year.
The process to set up a RRIF, is that you must complete a RRIF application form and transfer your RRSP tax-free to the new plan. If you turn 71 this year, this must be done by the year-end.
- The minimum annual withdrawal is based on the market value of the RRIF at the beginning of the year and your age.
- If your spouse/CLP is younger than you, you can base the minimum RRIF payments on their age which will result 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:
- 1 divided by (90 minus your age as of January 1st of the current year)
- This is multiplied by the plan’s value as of December 31 of the prior year to determine the RRIF minimum payment.
Over the age of 71 the following schedule applies:
|Age on January 1st||Minimum Annual Payment %|
|95 and over||20.00%|
When an individual passes away, any remaining assets in a RRIF is taxed as income in the year of death. However, if you name a “qualified beneficiary” the proceeds can roll over tax free to them.
- Your Spouse/CLP
- a financially dependent child or grandchild under the age of 18 and
- a financially dependent child or grandchild who’s dependent because of a physical or mental infirmity.
You have two options to name your spouse/CLP:
- With this designation, the RRIF is collapsed and then transferred to their RRIF or RRSP.
- Successor annuitant
- With this designation, the ownership simply 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.
You can have your payments set up as monthly, quarterly, or annually, depending on your cash flow requirements. Many people like a monthly payment as it is then like a monthly paycheck.
TAXES ON RRIF INCOME
The income coming out of the RRIF is 100 % taxable as ordinary income. You will want to plan for the income tax owing ahead of time.
Set Up Withholding Taxes
If you are only taking the RRIF minimum as income, no income tax is withheld on the payments. For payments above the minimum, tax is withheld automatically as follows:
|Amount withdrawn more than the minimum||All provinces except Quebec (%)||Quebec (%)|
|Up to $5,000||10%||20%|
|$5,001 to $15,000||20%||25%|
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 held in your RRSP.
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:
- Options for your RRSP; cash it in, buy an annuity, or convert to a RRIF and/or 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.
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®
For your FREE Copy CLICK HERE
For your free retirement readiness assessment CLICK HERE
To buy a copy of the book CLICK HERE
Jack Lumsden, MBA CFP® Financial Advisor, Assante Financial Management Ltd.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
Insurance products are services provided through Assante Estate and Insurance Services Inc.