Your Registered Retirement Savings Plan years come to an end when you reach 69.
If you reached this milestone in 2005, you have only a few more weeks to decide how to exit your plan. If you don’t take action before Dec. 31, the Canadian Revenue Agency will decide for you by deregistering your RRSP, which means you will be required to take your entire RRSP into income for this year at your marginal tax rate. This would probably leave you with a tax liability larger than you planned. However, you do have other options.
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The decision on how best to unbundle your plan should be made in the context of your total income and estate planning needs. This is not a simple process and might require investing in qualified and professional advice to help make the best decisions.
Basic questions need to be asked when looking at your total financial picture:
- What lifestyle do you and your spouse wish to maintain over the next several years?
- What are the monthly and annual cash needs required to maintain that lifestyle?
- What rate of inflation should be prudently assumed so that you don’t compromise your income stream?
After answering these questions, look at your non-RRSP assets and income sources. This should tell you how and when you need to integrate your RRSP money with cash flow from those other sources.
If your current resources are sufficient to maintain your needs and lifestyle, delay taking too much RRSP money into income to avoid a heavier tax burden. As your current resources diminish, begin to supplement them with timed withdrawals of the additional funds.
Of course, if you need your RRSP funds almost immediately to maintain your desired standard of living, you can structure the investments in a way that will start the flow of income from this pool sooner rather than later.
The question then is, how to convert your RRSP into a retirement income payout vehicle? These income options are available individually or in combination:
- Collapse all or a portion of the RRSP and take a lump-sum payment into income now and re-invest the after-tax funds.
- Transfer the funds to a Registered Retirement Income Fund.
- Buy a life annuity with your RRSP funds.
- Buy a Life Income Fund, a locked-in retirement income fund or both. If your RRSP contains locked-in funds transferred from a registered pension plan, this decision will depend on what province you live in.
The first option generally creates the largest immediate tax liability. The other options let you pace the timing of your income withdrawals and create the opportunity to defer taxes.
Even within these options, however, there are many variables that you need to consider. Collapsing or converting your RRSP in a way that will meet your needs and minimize taxes is a complicated task. That is why it is important to get the right professional financial advice to help with your exit strategy.
But remember, converting RRSP funds into eligible retirement income investment vehicles has to be completed before Dec. 31 if you turned 69 this year.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. His views do not necessarily reflect those of The Western Producer. Roche can be contacted at fbc@fbc.ca or call 800-860-7011.
