By the last day of the year you turn 71, you must close your Registered Retirement Savings Plan (RRSP) and choose one of three options;
- You can cash out the account and pay income tax on the whole amount
- Convert the investment to an annuity
- “Rollover” the investments in your RRSP into a Registered Retirement Income Fund (RRIF)
The latter two options safeguard your investment from taxation until you receive distributions, but there are key differences between these two options, and you should consider them carefully before moving forward.
RRIFs Compared to Annuities
An RRIF is a collection of investments such as stocks or bonds, similar to your RRSP.
In contrast, an annuity is essentially an insurance policy that provides you with a set amount of money annually or monthly for a contracted period of time.
For example; if you have $100,000 in an RRIF, that money is invested in stocks or bonds, and the value of your RRIF increases or falls as the value of the investment changes. But if you buy an annuity worth $100,000, however, you receive a set amount of money each year or month, and that amount does not change. Typically, the amount you receive is based on your age when you purchase the annuity.
Types of Annuities
The annuity described above is a single life annuity, meaning it pays benefits for a single person until his death.
There are also other types of annuities such as joint and survivor annuities which are designed for married couples, as these annuities pay out monthly payments until both partners die. Generally, the amount of the monthly payment is reduced after the death of the first spouse.
You may also be able to purchase this type of annuity with another person who is not necessarily your spouse.
There is a range of different features offered by various annuities. For example; some annuities guarantee to at least pay out the total amount of the principal balance. With this feature, if you bought an annuity worth $100,000 but have only received $50,000 in payments by the time of your death, your heirs would inherit the remaining balance of the annuity’s principal. Typically, the more features you choose, the more expensive the annuity.
Types of RRIFs
The two main types of RRIFs are self-directed and fully managed. If you want an adviser deciding how to allocate your investments, you may want a fully managed account. However, if you like picking and choosing investments, you may decide to opt for a self-directed account. Aside from these two options, you may want to consider the fees or penalties charged by the financial institution managing the account, as well as any extra costs or perks offered by the fund.
Comparing RRIFs and Annuities
Both RRIF and annuities have their benefits and downsides in a retirement plan. If you choose RRIF, you will benefit from long term investment options that are flexible and rewarding. However, RRIF exposes you to the risks that come with investments so you might increase your earnings some days and lose money in others. The annuity gives you peace of mind that you are earning a fixed amount periodically, but also it removes any flexibility to control your funds.
You may want to look at the monthly payment you would receive with an annuity and then calculate if an RRIF could yield the same or a larger monthly payment. However, when thinking about the monthly payment your RRIF could yield, you need to take into account how much the stocks in the RRIF are likely to grow. To account for volatility, many financial analysts suggest using a 2% projected growth rate with an RRIF.
Tolerance for Risk
As you are probably well aware, the money in an RRIF may grow by more than 2%, and in some cases, you may want to hang onto your RRIF just because of the potential for growth. Unfortunately, with stocks, you can make a lot of forecasts, but there are no earnings guarantees. Conversely, with an annuity, you are guaranteed to receive a certain amount every month, and there is little to no risk. Ultimately, you need to be realistic about your own tolerance for risk and determine what types of investments appeal to you the most.
Keep in mind, however, you don’t have to convert your entire RRSP to an RRIF or an annuity. Instead, if you like, you may take a more balanced approach by putting some of your RRSP funds into an RRIF and using the rest to purchase an annuity.
Tax Considerations
You report the payments from your RRSP annuity as income on line 12900 of your income tax return. However, RRIF income is reported on line 11500 if you are 65 of age or older, or if you are younger than 65 years old and receive a benefit due to the death of your partner. Report the RRIF income on line 13000 if you are younger than 65 years old and don’t receive benefits due to the death of your partner.
When receiving retirement income, you might qualify for senior credits such as age amount and pension amount. Check these TurboTax links for more information on other senior credits and senior income.
TurboTax software can guide you on how to report your retirement income from RRIF and annuity plans. Consider TurboTax Live Assist & Review if you need further guidance, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Live Full Service* and have one of our tax experts do your return from start to finish.
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