A Registered Retirement Savings Plan is a key component of tax and retirement planning. Nonetheless, reaching age 71 triggers many tax consequences for RRSP owners. Know your options so you can maximize your benefits.
Impact on Contributions
The last day when you can contribute to your RRSP is Dec. 31 of the year when you turn 71. After that date, you can no longer contribute, and any unused portion of your RRSP deduction limit will be lost. However, you can continue to contribute to your spouse’s RRSP if your spouse has not yet reached age 71. Such contributions are deductible, but they cannot exceed your own deduction limit.
If you made contributions in previous years but did not deduct them, you have two options: either withdraw them, or leave them in the plan. If you choose to withdraw them, they will be included in your income for the year, but you may be able to deduct an equivalent amount if they were recent. The tax rules surrounding withdrawal of excess contributions are complex and should be analyzed carefully prior to the withdrawal.
Reaching age 71 also effectively terminates any lifelong learning plan or a home buyers’ plan associated with your RRSP. You must repay them or include them in your income.
Termination of RRSP
Reaching age 71 also means that you need to terminate your RRSP. You have three options:
- Withdraw the funds.
- Purchase an annuity.
- Transfer the funds to a registered retirement income fund.
All of these options have different consequences, and the choice depends on your personal situation.
If you choose to withdraw the funds, they are added to your income and you must pay taxes on them. The rate of taxation varies depending on what other income you may have. If you are in a low-income tax bracket, this option may make sense for you. If you are in the higher brackets, consider the other choices as well.
First, you can use the funds to purchase an annuity. There are many types of annuities, but the basic rule in all of them is that you will receive a fixed monthly payment for a predetermined amount of time or for the rest of your life. That amount is taxable at your normal rate for the year when you receive it.
Your second choice is to transfer the funds to an RRIF. An RRIF is very similar to an RRSP in the way it functions, but you must withdraw a portion of it annually and pay taxes on the withdrawals. Otherwise, an RRIF can make the same investments as an RRSP and can be self-managed if you wish.
The choice between an annuity or an RRIF depends on your tolerance to risk and whether you need to have a fixed source of income. Financial institutions and insurance companies offer many different options; familiarize yourself with them before reaching age 71.
