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Canadians must convert their Registered Retirement Savings Plans (RRSPs) and locked-in RRSPs into a form of income by the end of the year in which they turn 71 years of age. This life event presents a number of options, which are discussed in this booklet.
Making the right choice for you is an important life decision. With all the changes that retirement brings, you need to make the best use of your RRSP savings to enjoy your retirement to its fullest.
When it comes to converting your RRSP into income, there are more options available to Canadians today than ever before. Depending on your preferences and goals, you can choose just one option or a combination.
Some of today's options are flexible so if your financial needs change, you can select new options that best meet your changing needs.
A straightforward option is to convert your RRSP money into cash. If you choose this option, you should be aware that any amounts received from your RRSP will be considered income in the year you receive it.
This means you will pay tax on the cash sum you receive from your RRSP. Before choosing this option, we recommend you consult a financial advisor.
In exchange for a single lump sum investment, an insurer makes guaranteed regular income payments to an investor that contain both interest and a return of principal. Annuity payments can continue for a chosen period of time or for the lifetime(s) of one or two people.
If you are interested in securing guaranteed income for your retirement, you will want to consider a Life Annuity. With a single up-front investment, a Life Annuity can provide income to you and your spouse (if selected) for the rest of your life, regardless of market conditions or interest rate fluctuations.
A LIF allows the transfer of locked-in funds from a pension plan when you terminate employment, or from a locked-in RRSP or a Licked-in Retirement Account (LIRA) to a retirement product that is essentially as flexible as the RRIF. A LIF can offer investment and payout flexibility with a set minimum and maximum each year.
Ontario introduced a new Life Income Fund (New LIF) in 2008. The New LIF can be acquired with funds from an Old LIF, a LIRF, a LIRA, or the commuted value of a Registered Pension Plan (RPP) (subject to the terms of the pension plan).
With the introduction of the New LIF, an Old LIF or LRIF is no longer available for purchase however existing contracts can continue or the funds can be transferred to a New LIF or used to buy a life annuity.
Within 60 days of transferring locked-in funds from a LIRA or an RPP into a New LIF, there is a one-time opportunity allowing up to 50 per cent of the value of the transferred funds to be taken in cash or transferred to a regular RRSP or RRIF.
If you worked for a federally regulated organization your pension, Licked-in RRSP, or LIF will be governed by federal pension legislation.
Starting in 2008, holders of a federally governed Locked-in RRSP or LIF who are age 55 or older can transfer their locked-in funds to an RLIF. An RLIF is similar to a regular LIF but, within 60 days of opening the RLIF, there is a one-time opportunity to transfer 50 per cent of the total value to a regular RRSP or RRIF.
A RRIF is a flexible income option that allows you to:
A Registered Retirement Income Fund (RRIF) is a registered account that allows you to continue the investments held in your RRSP on a tax-sheltered basis, while paying you an income for as long as you choose or as long as there is money available in the plan.
Different types of RRIF plans offer different investment options.
A Daily Interest Account is a temporary account that usually pays daily interest at a low variable rate. You can access your money at any time without penalty or you can invest it for longer terms when you feel interest rates are more acceptable.
With Guaranteed Interest Contract (GIC) your investment term can usually range from one to thirty years. You pick the length of term and your money earns that guaranteed interest rate over the term specified.
At the end of that term, you can choose to reinvest for a term that suits your needs. Some RRSPs allow you to transfer assets from existing terms intact, giving your flexibility to convert to a RRIF.
Click here to see today's RRIF GIC rates
Another option is investment funds. Your RRIF can hold segregated funds or mutual funds where the performance is tied to the underlying investments held in the fund. These are typically based on the stock and/or bond markets, and returns will fluctuate with the market's performance.
You could select a self-directed RRIF, where you can hold a combination of assets in your RRIF. Your advisor can provide you with more details on this type of account.
Most RRIFs give you a choice of monthly, quarterly, semi-annual, or annual payments. As well, a variety of income payment choices are available including:
Extra cash withdrawals may be made as you require them, depending on the terms of your plan. Charges may apply to withdrawals.
Whatever option you choose, you should remember that any payment received from your RRIF is fully taxable and must be included in your income in the year you receive it.
Each year, beginning the year after you open your RRIF, you must begin receiving a minimum amount of income as determined by the Canada Revenue Agency (CRA). This minimum depends on the value of your RRIF at the beginning of the year and your age.
READ: RRIF Minimum Withdrawal Rules and Table
Any amount you receive from a RRIF is taxable, and must be included in your income in the year you receive it. In addition, when payments exceed the RRIF minimum, by law, tax is withheld on the excess amount. This tax is taken directly from your RRIF payment and remitted to CRA on your behalf.
In the first calendar year the RRIF is issued, the RRIF minimum is nil. Since no minimum payment is required in the first year, CRA considers any payment to be an "excess payment". This means that tax is deducted on all amounts paid to you in the first calendar year. When you complete your tax return each year, deduct the amount of tax withheld from your RRIF from the total amount you owe.
When payouts are made from a RRIF in Canada to a foreign resident, there is a legal requirement to deduct tax from both the RRIF minimum amount and any amount paid out in excess of the RRIF minimum.
If you have a spouse at the time of your death, your RRIF plan may allow your spouse to become the annuitant (owner) under the RRIF. Payments would then continue to your spouse. Otherwise, the RRIF must be collapsed and the value of the RRIF must be paid to the named beneficiary or to your estate.
In this case, the full value of the plan would be considered income and would be taxable to your estate in the year of death. There are exceptions if the beneficiary is:
If your contract allows, you can transfer all or part of the RRIF to another type of RRIF at any time. You may also choose to transfer money to any type of annuity, ensuring either a guaranteed income for a specified term or a guaranteed income for life.
Charges may apply on some transfers. If you transfer your RRIF to another carrier, other conditions may apply.
A Spousal RRIF is set up from a Spousal RRSP. A spousal RRSP is a plan where you make the contributions to the RRSP, but your spouse is the annuitant (owner).
The main benefit is to achieve some tax savings through income splitting, assuming your spouse's income is lower. Any payments paid to your spouse will be taxed at a lower marginal rate.
Any amounts paid to your spouse in excess of the RRIF minimum for the year will be included in your income that year, rather than your spouse's (up to the amount of your contributions to a spousal RRSP in the current or two preceding years).
Note: This attribution rule does not apply if you and your spouse are living separately (due to marriage breakdown), you or your spouse is a non-resident when the amounts are withdrawn, or if the spousal RRPS is used to purchase an entity.
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