Will it soon be time to dip into those Registered Retirement Savings Plan (RRSP) funds you’ve wisely accumulated over the years?
If you’re turning 71 by the end of this year, you have no choice: the law requires you to wind down your RRSP before 2012. But most people start using their RRSP dollars for retirement income before then.
Either way, you have three basic rollover options to choose from and the right choices can help make the most of those funds through all your retirement years. Your options are:
Cash out your plan. Not recommended because you will likely be taxed on the total amount right away at your highest marginal rate.
A Registered Retirement Income Fund (RRIF) — the preferred roll-over choice for most Canadians. Just like an RRSP, a RRIF generates investment returns that combine with the principal amount to create an income stream. Your money will continue to grow tax free until you take it out as income. You can’t contribute any additional money to a RRIF and you’ll pay taxes on the amounts you withdraw. Depending on your age, you must withdraw minimum amounts from your RRIF each year but there is no limit on the maximum amount you can withdraw (although you won’t want to deplete your RRIF too soon).
Purchase an annuity — the second most popular RRSP rollover option. You contract with a financial institution to receive a regular income (usually monthly) for life or to a specified age in exchange for a fixed amount of money. There’s no need to manage the securities but your payments will be fixed and won’t increase to compensate for inflation or rising living costs. As well, if you purchase an annuity at a low interest rate, your payments will be lower over the life of the annuity. Many types of annuities are available, from ‘life annuities’ to ‘term to 90’ annuities that provide income to age 90.
There can be definite advantages to transferring a portion of your RRSP assets to a RRIF and the remainder to a life annuity that provides the income to pay for basic expenses.
To be sure you make the right rollover decisions, start planning well in advance — and talk to your professional adviser about the best conversion options for your situation.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.