Moneywise: Get advice to navigate options on closing your RRSP

At some time Canadians who have been tucking away money for their retirement in a Registered Retirement Savings Plan (RRSP) will have to close it down and decide what they are going to do with those savings.

“There are quite a number of options and rules regarding closing down your RRSP that require some planning and professional expertise,” says Nathan Osterhout, a financial adviser with Edward Jones in Edmonton. “If you do not pay attention to what you are doing you can create problems regarding tax, estates, and your Canada Pension Plan (CPP) and Old Age Security (OAS) payments.”

Osterhout says that statistics show that about 21 per cent of Canadians over the age of 65 have an income of less than $50,000. “That’s not a lot of income to last a retirement that could last 30 years or even more,” he says. “A lot of people simply don’t know how to withdraw their money properly.”

The majority of Canadians opt to convert their RRSP into a Registered Retirement Income Fund (RRIF) after they turn 71.

A RRIF is an extension of an RRSP. While an RRSP is used to save for retirement, a RRIF is used to systematically draw income during retirement.

Under current rules an RRSP must be converted either to an RRIF, an annuity or paid out in a lump sum by the end of the calendar year in which you turn 71.

You can convert into a RRIF at age 65 and begin to take annual payouts based on the value of the fund.

For RRIFs set up after the end of 1992, payouts begin at four per cent at age 65, rising to five per cent at age 70, 6.82 per cent at 80, 11.92 per cent at 90 and then 20 per cent at age 95 or older.

Many Canadians may not be fully aware of the tax implications of RRIF withdrawals and whether conversion to a RRIF requires a change in the plan’s investment strategy.

Some people will opt to withdraw their money early. Withdrawals are considered taxable income and are added to your other income. Withdrawing funds early or withdrawing more than required may end up increasing your income, putting you in a higher tax bracket and resulting in your OAS payments being clawed back. Claw backs start at an income of $73,756.

“People who do this generally are not prepared for the unexpected or for emergencies and this becomes their emergency fund,” Osterhout says. “This often comes about from taking the short-term view and could result in a big tax hit.”

Another disadvantage of early withdrawals is that you lose the benefit of tax deferred growth. “Matching growth with the rate of withdrawal is the Shangri-La,” says Osterhout. “A lot of the ability to do this will depend on the individual’s risk profile.”

If your spouse is younger than you are you can base payments on his or her age, allowing for lower minimum payments and longer tax-deferred growth of your investments.

Your RRIF can hold a variety of investments just like your RRSP and you may want to select a diversified portfolio that allows for both the flexibility of short term funds to withdraw annually as well as longer-term equities or mutual funds for growth.

Conversion of your RRSP into a RRIF does not necessarily mean you should change your investment strategy. Any changes should be made due to the passing of time, not because the money is moving from an RRSP to a RRIF.

As well, there are estate considerations associated with RRIFs. Consider naming your spouse as the successor annuitant of your RRIF. This designation allows RRIF payments to continue to go to the surviving spouse without interruption and minimizes estate administration and taxes.

“People need to sit down with an adviser and make sure that the dates and numbers all line up,” Osterhout says. “It’s quite a bit or work.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

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