Turning 71 in 2016: what does it mean for your registered retirement savings plan?

Financial institutions dominate newspaper and television advertising every January and February as they explain how you can minimize your taxes by contributing to a Registered Retirement Savings Plan.

Rarely communicated is that the government eventually expects the taxes that were deferred to be paid back. For most Canadians, that occurs by Dec. 31 of the year they turn 71, when they must terminate their RRSP.

It is also the last day that they can contribute to their RRSP.

Many in the Canadian farm community are approaching this age, and we advise that you begin to plan early for managing the wind-up of your RRSP with the assistance of a tax or financial adviser.

In the year you turn 71, you must choose one or a combination of the following options for your RRSPs:

  • Withdraw the funds.
  • Transfer them to a Registered Retirement Income Fund, which is an investment vehicle that may contain mutual funds, guaranteed investment certificates or other financial instruments. It regularly pays out to provide you with the income you have determined you need. Earnings in a RRIF are tax-free, but the amounts paid out are taxable on receipt.
  • Use them to buy an annuity. You buy an annuity from a financial institution, and it guarantees to pay you an income for life or for the period specified in the annuity contract. Similar to a defined benefit pension, annuities provide an income that is secure from both market and interest rate risks.

If you do not make arrangements to take the RRIF or annuity routes, the government will assume you have withdrawn the funds all at once and tax them as if they were income taken in 2016.

Your RRSP issuer will automatically withhold the appropriate amount of taxes, which could be financially painful.

Many people decide to transfer the money in their RRSP into a RRIF.

Generally, you pay taxes on the income you start receiving from the RRIF. Because RRIFs pay out income to you on a prescribed annual percentage of the fund, the tax rate should be lower than if you had withdrawn the funds all at once.

RRIF accounts can be set up through a financial institution such as a bank, credit union, trust or insurance company. You can have more than one RRIF and can also have self-directed RRIFs. The rules that apply to self-directed RRIFs are generally the same as those for RRSPs.

Once the RRIF is established, no more contributions can be made to the plan and the plan can’t be terminated except through death.

Buying an annuity is another option. It is a long-term investment that is issued by a financial institution and designed to help protect the buyer from the risk of outliving their income. Through annuitizing, your RRSP transfer is converted into periodic payments that can last for life.

There are numerous forms of annuities: immediate, variable or fixed. Some popular annuities are:

  • A life annuity provides regular periodic payments for life, depending on your (and perhaps your spouse’s) age and gender, and current interest rates.
  • A life income fund (LIF) allows control over investments in the account and is subject to minimum and maximum annual withdrawals.
  • A locked-in retirement income fund (LRIF) also allows control over investments in the account and is subject to minimum and maximum annual withdrawals.

Federal or provincial pension legislation defines the minimum age at which a locked-in retirement account (LIRA) can be transferred to a life annuity, LIF or LRIF.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 800-265-1002.

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