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The Money Management Newsletter: Retirement Income Planning
Your time is running out

Time is running out if you turn 71 by the end of the current calendar year.
You must close out your Registered Retirement Savings Plan (RRSP) by December 31 of the calendar year when you turn 71. This is because of changes in the law requiring that you collapse your RRSP in the year you turn 71. Previously, the age limit was 69.

What alternatives do you have when you close out an RRSP? This is one of the frequently asked questions from my clients.

You have the following options when you close out your RRSP. Let's examine each one.

1. Withdraw part or all of the funds in your RRSP

If you do this, you have to include this amount in your income tax return. The disadvantage is that you have to pay tax on this amount. In our tax system, the higher your income, the higher your tax rate. Therefore, you may be paying more tax than you need.

Let's look at an example. If your taxable income is less than or equal to $31,677, your federal tax rate is 16%. If your taxable income falls between $31,677 and $63,354, your federal tax rate is 22%. If your taxable income falls between $ 63,354 and $103,000, the federal tax rate is 26%, and for taxable income over $103,000, the rate is 29%. The additional taxable income you will incur if you withdraw all of your RRSP may put you into a higher tax bracket as shown. These are 2002 federal tax rates and are indexed each year. In addition to federal taxes, you have to pay provincial income tax. Your total tax bill is different depending on your province. The strategy is that unless you need to use this money, consider options 2 and 3.

2. Buy an annuity with the funds in your RRSP

An annuity is a sum of money you receive on a regular basis. You can buy an annuity from a bank, trust company, or Life Insurance Company. The balance in your RRSP when you close it out, your age when you purchase the annuity, your gender, the kind of annuity and the current interest rates will determine how much you will receive on a regular basis. The annuity payments may be a fixed amount or indexed to inflation. Examples of the kinds of annuities include single life annuity, joint life annuity and term certain to age 90.

The advantage of this option is that you don't have to pay tax on the entire balance in your RRSP, just the annual amount received from the annuity. The disadvantage is that you don't have control over your own investment as you would in the third option.

3. Open a Registered Retirement Income Fund (RRIF)

A RRIF can be opened at any age, but you can purchase it only with money from an RRSP. You can buy a RRIF from a bank, trust company, credit union, investment brokerage firm or life insurance company.

The major advantage of a RRIF versus an annuity is that you can control how you invest your money in an RRIF whereas for an annuity the financial institution controls the investment choices.
You can open a self-directed or self-administered RRIF, and hold the same types of investments as in a self-administered RRSP.

With a RRIF, there is a minimum amount that you must withdraw each year, as determined by Canada Customs and Revenue Agency. The minimum amount withdrawn is included in your income for the year, and you have to pay income tax on it. If you wish, you can withdraw more than the minimum amount to meet your cashflow needs. The minimum amount is calculated as a percentage of the outstanding RRIF balance at the beginning of each year. The percentage amount increases yearly until age 94 after which it is capped at a constant 20%.

4. Select a combination of the above three options

If you have a number of RRSPs with different trustees, you may wish to consolidate them if the individual amounts are relatively small before making a post RRSP decision. It is not necessary to limit yourself to just one of the options discussed as you can select any combination of them. Before making a decision, weigh all the pros and cons and consult your tax advisor.

For more information, contact Anne Chun via her advisor profile, or her website.

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© , Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.
(905) 844-7700

 





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