Are You Retired and Have an RRSP?

September 29, 2017

You may be among the several thousand people in New Brunswick who have to make a decision and act on it before December 29, 2017.

When people who have invested in registered retirement savings plans (i.e. RRSPs) reach 71 years of age they have to either convert or collapse those plans. This conversion or collapse of an investor’s RRSP is required so the government can begin to collect tax on this tax-deferred pool of money.

There are really only three options RRSP investors have when they reach 71: 1) convert their RRSP to a registered retirement income fund (i.e. RRIF); 2) convert their RRSP to a life annuity; or 3)cash in the entire plan.

Converting an RRSP to a RRIF is the most common approach. A distant second is those who convert their RRSP to a life annuity. On very rare occasions, it makes sense for an RRSP investor to simply cash out of the plan entirely thereby subjecting the whole balance to taxation in the year in which it is cashed.

The simplest, least disruptive and most flexible approach for investors is to switch directly to a RRIF from an RRSP. It usually means that there is no need to sell any of the investments already owned in the RRSP.

Once the switch is made to a RRIF the owner is obliged to withdraw a portion of the plan each year. The amounts are calculated as a percentage of the year-end value of the RRIF for the following year. For example, a 71-year-old would be required to withdraw 5.28% of the previous year-end value of their RRIF by the end of the following year. The percentage increases slightly each year.

When an investor with money in a RRIF passes away, the holdings are passed directly to a beneficiary named on the plan. If that beneficiary is a spouse or a dependent child the assets move to the new owner without taxation. If the beneficiary is anyone else, taxes will apply in that final year because the entire value of the RRIF will be received as income in the hands of the deceased owner.

The only other way to continue some tax deferral of registered assets beyond an investors’ 71st year is to use the RRSP money to purchase a life annuity. As the name implies, this vehicle produces either a constant or an indexed income stream for the life of the owner. When the owner dies, whatever is left belongs to the insurance company. It is often recommended that you can add an optional guarantee period to the payments in order to ensure that your spouse or family receives at least a portion of the capital at your death.

You should also know, you need not wait until you are 71 years of age to convert some or all of your RRSP to a RRIF.

Finally, it is a good idea to consolidate your RRSP holdings into a single RRIF plan when the time comes to convert your plans. It is a matter of simplifying your financial life and getting professional assistance at a time in life when it may be important to do both.

Keir Clark (www.keirclark.ca) is a Portfolio Manager for ScotiaMcLeod®, a division of Scotia Capital Inc. in Fredericton

This article is for information purposes only. All performance data represents past performance and is not indicative of future performance. It is recommended that individuals consult with their Wealth Advisor before acting on any information contained in this article. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”) Member, CIPF, but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI.  The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable.