RRSPs are good to age 71 — then what?
RRIF minimum withdrawals have been changed, and TFSAs act as a back-up plan
Millions of Canadians have set up RRSPs – plans that, at some point in the future, will need to transition from accumulating money for retirement to paying out money in retirement.
Canadians face two broad choices when they mature their RRSPs – converting them to a Registered Retirement Income Fund, or RRIF, or buying an annuity. The RRIF is the usual choice, because at today's low interest rates, annuities might not cover your retirement income.
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The decision has to be made at the latest by the end of the year in which you turn 71, but converting an RRSP to a RRIF to provide an income can be done at any time — for example, if you retire at 50 or 60 and need an income.
"What you really need to do is sit down with a financial adviser. Hopefully, you have a relationship with someone at this point," says Katrine Clark, a financial adviser with Edward Jones in Vancouver.
An adviser will help you work out a plan that gives you the growth you need to make your money last and the income you need to live.
There is a lot of long-term thinking involved, but the conversion process is simple.
In fact, converting an RRSP to a RRIF can seem like little more than a name change, in that the RRIF can hold most of the same investments the RRSP did. You can even hang on to your old financial adviser.
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This is the time to reassess your investments and try to plan an income stream that will last for life.
"Often, people end up with RRSPs in all different places," Clark said. "This is a good opportunity to consolidate them because you don't want an income stream from several different places."
Anything you take out will be taxed as if it was income, so have a detailed discussion about taxation with your financial adviser.
There is a minimum withdrawal from the RRIFs every year, depending on your age and the amount of money you are holding. Minimum annual withdrawals start at low levels and rise steadily with age.
The previous federal government reduced the minimum withdrawals from an RRIF because of complaints by retired people that they were forced to withdraw too much and could run low on money if they lived into their 90s. The Liberal government has made no move to change those minimums.
Use age of younger spouse in drawdown
Our experts all pointed out that those same RRIF rules also allow you the option of electing to use your younger spouse's age to arrive at the minimum withdrawal amount, rather than your own.
If you are still taking out more than you can use, ask your adviser about effective strategies for a TFSA, as you need no earned income to use the tax-free savings plan.
"If you don't need the income, you can take the cash or investment in kind and move it into a TFSA. It will continue to grow tax-free," Clark said.
RRIF withdrawals at age 65 and beyond also qualify as pension income, and so they fall within the boundaries of the pension income tax credit. That's a federal tax credit on the first $2,000 of qualifying pension income each year.
Each spouse can claim that credit, so the experts say each spouse should try to arrange at least $2,000 in qualifying retirement income.
Alternatively, people can use the proceeds of the RRSP to buy an annuity.
With a "fixed annuity," you hand a lump sum of money to an insurance company. and you are guaranteed a predictable cash flow for life, no matter how long you live. Most of the time, there is nothing left of the principal to leave to your heirs when you die, but you have the reassurance of a steady income.
Advisers say an annuity can be combined with CPP or an RRIF in your pension planning.
Annuities come in different varieties — single life, joint and last survivor, term certain, and so on. The more bells and whistles the annuity has, the more it will cost, meaning that the monthly payout will be less.
Life annuities, bought from insurance companies, guarantee their payouts for the life of the holder, so they are attractive for people worried about running out of money.
Now is not the best time to buy an annuity. Annuity payouts depend on a number of factors – with one of the most important being current interest rates. And as rates are at record low levels, it can be discouraging to see what kind of income an annuity offers from your savings.
"Two decades ago, annuities were more prevalent because interest rates were higher," Clark said.
Still, they can be a good option for people with a very low risk profile as there is a no danger of volatility, she said. Alternatively, retired people may begin with an RRIF but move to an annuity when rates look more promising.
There may be reasons to take cash out of your RRSP, but bear in mind, you will pay tax on the whole amount. That's the payback for the tax break you got for saving in an RRSP when you were working.
Clark said some people take the chance to withdraw cash to spend $10,000 on a once-in-a-lifetime cruise or similar expense, but that decision should only be made with financial advice.