Choosing a Retirement Route
If you are approaching retirement, then it's time to think hard about what you'd like to do with the money you've accumulated in your RRSP. By the end of the year in which you turn 71, you are required by law to terminate your RRSP and convert it into a form of retirement income. There are three basic options to choose from when it comes time to mature your RRSP:
- Cash it in. If you simply withdraw all the money from your RRSP, the entire amount will be taxable in the year it is withdrawn. If the amount is substantial, this will subject you to tax at a higher marginal rate. If you have little or no other income, it may make sense to make a partial withdrawal.
- Use your RRSP funds to purchase an annuity. This will provide you with specified monthly payments, either for life or for a fixed term (usually until age 90). The payments may be constant, or they may increase at regular intervals, either by a fixed percentage or to match inflation.
- Convert your RRSP into a Registered Retirement Income Fund (RRIF). An RRIF is much like your RRSP, except that you can no longer contribute to it. Like an RRSP, income earned by your RRIF is allowed to accumulate tax-free.
The RRIF Advantage
With RRIFs, there are no restrictions on when, or how much, you withdraw, as long as you withdraw a minimum amount each year. You also retain control over how your savings are invested. For example, you can move your assets between mutual funds and interest-bearing investments as market conditions change. Because of this greater flexibility, most taxpayers choose the RRIF option.
Withdrawing From Your RRIF
The minimum amount you must withdraw from you RRIF depends on your age, or, if you choose, the age of your spouse. It is set by the schedule shown below. You are required to make your first withdrawal in the year after you establish your RRIF. Thereafter, you have to withdraw at increasingly higher rates.
|Minimum Amount of RRIF Withdrawal|
|Age at beginning of the year||Factor of the year||Age at beginning of the year||Factor of the year|
|Under 71||1/(90 - x) *||83||.0958|
|81||.0899||94 or older||.2000|
|*X = Age at the beginning of the year|
Making the Most of Your Retirement IncomeAs long as your money is in an RRSP or RRIF, it is earning tax-deferred income. This means that as long as you are allowed to contribute to an RRSP, you will want to contribute as much you can. After that, you will want to withdraw as little as possible from your RRIF. Here are some tax strategies aimed at these ends:
Choosing your spouse or common-law partner's age to establish your minimum amount
Remember that you can choose your spouse or common-law partner's age instead of your own when you are establishing the minimum amount you have to withdraw from your RRIF. If your spouse is younger than you, this will result in a lower minimum amount.
If you wish to use your spouse or common-law partner's age instead of your own, you will have to do so in the first year.
Contributing to your spouse or common-law partner's RRSP
Although you cannot contribute to an RRSP of your own after December 31 of the year in which you turn 71, you may still contribute to your spouse's RRSP if he or she is within the age limit. In order to do so, you must have sufficient RRSP deduction room. This can be in the form of unused deduction room you are carrying forward from previous years. Or, if you are still working, it would be in the form of new deduction room.
Few people realize you can still create new RRSP deduction room even though you are too old to have an RRSP.
Over-contributing in your last year
If you are still working, you should consider making an RRSP over-contribution in December of the year in which you reach the age limit. Although you will be subject to a 1% penalty tax for over-contributions, it will only be for one month. You may then claim a deduction for the contribution in the following or subsequent years.