Turning 71 RRSP’s & RRIF’s
The large number of baby boomers now retired for some years, means some are already age 71 or soon will be. As taxpayers, they must terminate their RRSP’s by the end of the calendar year they turn 71. A number of steps can be taken with the advice of your tax accountant:
- CANCEL your RRSP Plan and withdraw the amount in full. The unwelcome result is that the income you avoided in your plan over the years is now taxable as a lump sum entirely. For those with large balances, this places them in a high bracket and can erase a large portion of savings.When retired, one wishes to have the benefit of all those hard earned dollars that were not spent at the time, but placed in their RRSP. The funds must find a place to be gainfully invested to earn retirement income. Savings Plans and GIC’s or government bonds now pay such small interest rates, that to place them in that manner may mean you do not even match inflation and are actually worth less as each year passes.
TRANSFER TO A RRIF. By collapsing your RRSP and the transfer to a Registered Retirement Income Fund. This can be arranged with your financial institution well before you reach age 71. RRSP’s must be closed before age 72, but there is no minimum age for closing your RRIF. The year after your RRIF is established, a minimum amount must be withdrawn.
Your RRIF can contain the amounts from your RRSP but you cannot contribute more each year as with a RRSP. Hopefully the balance can grow within the RRIF plan as with an RRSP. After a year, certain amounts must be withdrawn as indicated. This minimum amount is calculated as a percentage of the market value of your plan. This starts at 7.38 as the least amount added to your income and can be as large as 20 percent after attaining the age of 94.
There are some considerations worthy of note in a RRIF. The money remains growing in the plan without tax payable until withdrawn, as with your RRSP. You must take out certain minimum amounts each year but can take out more for your needs if necessary. Since these funds are continued to be invested in various means, as you get older, it is likely important to have sound financial advice with those investments.
It is entirely possible that individuals may pass away while still holding funds in their RRIF plans.If the person has a surviving partner-spouse-they can be named as a successor to receive RRIF payments. At the time of death, usually the the fair market value of the RRIF is included in the deceased’s income. By naming the spouse as a beneficiary of the RRIF, the amount can be transferred to a RRIF of the spouse without attracting tax at that time. Often, if the spouse is under age 72-the plan can be transferred to their RRSP. The funds in a RRIF assigned to a beneficiary are taxable to them.
The normal rule is the funds in the RRIF left to others must be cancelled and the resulting tax paid by the Estate.
BUY AN ANNUITY You can use your RRSP funds to purchase an annuity. This provides a predictable monthly payment on retirement that many like to rely on. Such annuities are sold by insurance companies who are masters at calculation of expected death rates, investment returns to fund the annuity and secure the investments. Of course the amount you actually receive back from the annuity varies with factors such as: The $ in your RRSP, Current investment return rates, your age and expected date of death and what other features you wish included in your price.
If you are relatively healthy at the time of purchase and expect to outlive the average, it could be a positive step. With an annuity, a person receives a fixed monthly amount for the remaining time still alive. If you are older and rates are high at the time of the purchase, you would receive a greater monthly payment. Those younger or those when purchasing at a time when interest rates are low as today,can expect lower payments. Payments will normally end when a person dies unless other expensive options are obtained.They can be Joint Survivor plans where the payments continue to your spouse for her/his lifetime. Also available are plans where payments are guaranteed for a certain period and if you predecease before the period expires, the benefits will accrue to your beneficiaries. Other plans may specify the payments end at a certain age.
There are certain advantages and disadvantages to the within stated options that should be discussed with professionals, before a person reaches 71. Annuities give guaranteed payments usually for life but are not availability as a lump sum at anytime. Payments are taxable each year received. RRIF’s protect the income from taxes while in the plan, and can be available as lump sums in an emergency. Balances remaining on death can be transferred to beneficiaries while with annnuities, value ends on your death and no further benefits remain.