Families, RRSP

Converting Your RRSPs to RRIFs or Other Retirement Vehicles

All your RRSPs (Registered Retirement Savings Plans) have to be closed by December 31st of the year you turn 71.

Waiting until you turn 71 and then cashing out all of your RRSP savings is not a good thing to do, because all the money you were sheltering in your RRSPs immediately becomes income and you could end up paying a larger proportion to tax.

This blog explores other options for dealing with the money in your RRSPs that make more sense tax-wise.

Converting Your RRSPs to RRIFs

One way that you can continue to defer paying tax on some of the money you currently hold in RRSPs to is convert your RRSPs into RRIFs (Registered Retirement Income Funds).

Like RRSPs, RRIFs can be self-directed or fully managed and contain different investments, such as mutual funds.

Unlike RRSPs, however, once you create a RRIF, you can’t contribute to it or terminate it. (It will end when you die.)

And each year, you must withdraw money from each RRIF. While there is no upper limit set on how much you can take out, there is an enforced minimum withdrawal amount determined by a formula based on your age and the value of the RRIF at December 31st of the previous year.

These minimum withdrawal amounts increase with age. For instance, at age 71 the minimum withdrawal amount is 7.38%, which increases to 9.58% at age 83 and 13.62% at age 90.

But the beauty of converting your RRSPs to RRIFs is that the bulk of your investments are still sheltered from tax – and investments within RRIFs continue to accumulate earnings.

Another Option: Annuities

You can also convert your RRSPs into annuities which pay you a steady stream of income.

There are two types:

1) Fixed-term annuities
which provide you with a set monthly income for an agreed number of years.
2) Life Annuities
which provide you with a guaranteed regular income for the rest of your life.

Annuities can be an attractive option because they take the uncertainty out of your retirement income. Investments within RRIFs may suffer from stock market drops and good times or bad, need to be managed. Annuities, on the other hand, once set up just continue to deliver the agreed on income.

What Happens to Your Annuity If You Die?

That depends on what kind you’ve purchased.
If you’ve bought a simple life annuity, the payments will end on your death. You can get life annuities that have guaranteed minimum annuity payment periods from five through 25 years, though, if you wish. If so, and you die before the guaranteed payment period is up, the payments will be made into your estate for the stipulated time frame.
If you die before the end date of a fixed-term annuity, the annuity will continue to be paid into your estate until its end date.