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The Money Management Newsletter: Retirement Income Planning
Turning 71 this year? What you should know about converting locked-in RRSPs into LIFs or RIFs

If you are aged (now age 71, changed in 2007))and have to convert your RRSPs to RRIFs before December 31 of this year, you may have a dilemma if you have GIC RRSPs that mature later than December 31 with one or more small trust companies that don't offer RRIF products.

The dilemma arises if your GIC RRSP has a very good rate that you would like to keep until the scheduled maturity date but if the institution does not offer a RRIF product they cannot convert the RRSP to a RRIF and maintain these terms for you. This problem should not exist if the company offers a RRIF. Upon instructions from you and the completion of their RRIF application the institution should convert your RRSP to a RRIF at the original terms.

If the former situation applies what should you do? There are a few options available. The first and most obvious is that you give up the rate and simply transfer the RRSP to a RRIF product at a new institution taking whatever rates are available at that time for whatever new term you select. This can be a blessing if the new RRIF rate is higher than what you were receiving on the RRSP, but in this current interest rate environment this will not be the case for most people. The institution releasing the funds may charge its normal transfer fee if one exists but in most cases they will not charge a penalty for removing the funds early since you don't have a choice. Beware those companies however that want to reduce the accumulated interest earned on the RRSP prior to transfer because the rate was based on say a 5 year term and maybe your transferring it after 3 years. They may want to pay interest at only the 3 year rate applicable at the time of purchase. Find out the policy ahead of time so you can argue your case if need be.

Another option available to you in some cases that will allow you to keep the original rate and term is to transfer the RRSP "in kind" to a self directed RRIF plan. Transferring "in kind" means that investment terms stay the way they are with the releasing company changing the GIC RRSP in your name to a straight GIC in the name of the new self directed trustee in trust for you thus keeping your investment registered. Check what fees if any are associated with the self directed plan and determine if this option is viable. You will want to compare how much extra interest would be earned on the investment at the existing rate versus current rates and whether this difference would substantially offset any self directed fees. Not all companies will transfer the RRSPs "in kind" so check ahead of time to see if this can be done. If your rate is particularly good you may want to exercise your powers of persuasion if a company initially refuses your request. An additional point to note is that your self directed RRIF must have enough liquidity to meet your required payments so if you are only transferring in one compound interest GIC there will not be any cash available to make the payments.

The last option I will mention is again to terminate the original contract as noted in the first option but instead of buying a GIC RRIF at current rates consider allocating this money to one or more mutual funds that meet your risk tolerances and investment objectives with the intent of obtaining a higher long term return.

Whatever option you decide to take remember one thing: don't leave it to the last minute as December will be a busy time for all institutions as they will have many RRSPs to transfer out or convert to RRIFs.

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