LIFE LETTER MATURE
How to get income out of your RRSPs
Like many Canadians, Roger and Linda have saved for years for their retirement. They took advantage of RRSPs and now have a substantial amount of savings. As Roger will turn age 71 this year, they need to decide on the best strategy for using their RRSPs for their retirement income needs.
Until now, Roger and Linda have been relying on their non-RRSP investments and government benefits so their RRSPs could continue to grow tax-postponed. Roger has to choose from the following by the end of the year or all his RRSP funds will be fully taxed:
Take the Money and Run - Roger can withdraw all, or a portion, of his RRSP funds as cash (different rules apply to "locked-in" funds). This is not generally recommended because heavy taxation could result. Any amount withdrawn from an RRSP is considered income for that year. Depending on his tax bracket and province of residence, he could pay up to 50% in income taxes. Also, any income earned on these funds after they are withdrawn is no longer tax sheltered.
Transfer to a Registered Retirement Income Fund (RRIF) - If the funds are locked-in (previously from a pension plan), they can be transferred to a locked-in version with plan name and features determined by province of residence. This is essentially an extension of his RRSP that can keep the investments mostly intact.
RRIFs require a certain degree of ongoing investment management that, depending on Roger's personal preference, may be an advantage or a disadvantage. Because the value value of the funds will depend on future returns, income levels may fluctuate.
Roger can choose the amount he wants to withdraw each year, subject to a minimum set by law. As there is no maximum (except with locked-in plans) on withdrawals, Roger could deplete his funds too soon.
Buy an Annuity - This will provide Roger with a guaranteed income for life or to age 90, depending on the type he chooses. However, once he purchases the annuity, he cannot change the payments or make lump sum withdrawals. Annuity payments are based on interest rates at the time of purchase. In times of low interest rates, Roger may want to use a RRIF initially and convert to an annuity when rates are better.
Roger does not have to make only one choice. He may take a cash lump sum for a major purchase, an annuity for a regular income to cover his basic living expenses, and a RRIF for inflation protection as well as liquidity for such things as emergencies, opportunities and travel.
Plan Your Retirement Income – because it’s the right thing to do.
Copyright © 2007 Life Letter. All rights reserved
Mutual confidence is the power that binds together all harmonious human relationships.