3 Options For Converting Your RRSP into Retirement Income

Retirement Income Planning, Calgary

Remember that awesome tax refund you received because of your RRSP contribution? The 2 main advantages of an RRSP is first, the immediate tax savings. The idea is to put money into an RRSP at a higher tax rate while you are working and take it out at a lower tax rate when retired. Second, you are using money that would have otherwise gone to taxes to build a retirement nest egg.

But, eventually, CRA wants some of that tax back. Before they force you to start taking some money out, what are your options? You actually have 3 options when it comes to converting your RRSP into a retirement income stream (RIFF).

1.) You can cash it in and take it all at once. You will pay a lot in taxes, so unless it's a very small amount, we don't recommend this. Sometimes cashing in part of your RRSP is a viable option, depending on your situation.

2.) You can buy an Annuity. You can take the whole lump sum, or a portion of it, and buy an income stream that will last the rest of your life or for a certain amount of time, say 20 or 25 years. You can buy a joint-life annuity so that the payments continue to a surviving spouse.

You can do a shorter-term annuity so that your income is higher early in retirement and then do a reverse mortgage for the remainder of your life. (It's one way to tap into the equity in your home.)

You can add different features to your annuity. You can use a cashable and deferred annuity that allows you to continue to get market growth and potentially increase your future income. Do not underestimate the benefit of incorporating annuities within your retirement plan. 

3.) RRIF. Registered Retirement Income Fund. Once you turn your RRSP into a RRIF you have to withdraw a minimum amount each year. The latest you can wait is at age 72.   At that age, the minimum withdrawal is 5.4%. You can take more, but you cannot take less. Each year following age 72 the withdrawal percentage increases. The nice thing about a RRIF is that you have access to your capital at any time and you can still be fully invested in the markets or in a wide variety of investments. The income you receive from either an Annuity or a RRIF will be taxed at the same rate. Keep in mind, you can turn your RRSP, or a portion of it, into a RRIF before age 71.

You can choose to do a combination of all 3 of these options. For example, you may want to use some of your RRSP to create a guaranteed income to always be able to pay for your basic living expenses. An annuity works well for this. One good thing about a RIFF is that you can still have your money growing in the markets which help protect against inflation. You can also take out money from your RRSP at any time to enjoy your life, help out a family member, or fund other non-registered investments.

When it comes to income planning, we like to use the least flexible and least tax-efficient income first. CPP, OAS, and RRSPs fall into that category. It's often a good idea to start taking some money out of your RRSP early, even if you do not need the money in order to maximize tax efficiency. You can move the unspent money into a more tax-efficient and flexible structure like your TFSA or a non-registered investment. This will provide you with more options on how the investment income is produced, how it is taxed, and how it is distributed after your death. As an added benefit, the more money you funnel into your TFSA for later in life means you can potentially qualify for more government benefits.

It's important to understand that there isn't a one-size-fits-all strategy, but rather you need an approach that is uniquely designed for you and takes into consideration your goals and values, timeline, risk tolerance, and lifestyle.

 

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Retirement Income, Investment & Tax Planning For Those 55+

Willis J Langford BA, MA, CFP

Nancy Langford CRS

587-755-0159

You may also like: Annuities or GIC's: Which are better?

 

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