So, you’ve been diligently contributing to your RRSP for years. How do you know when it’s time to stop contributing— and what are the options for those funds?
As the Canada Revenue Agency notes, the last year you may contribute to your RRSP is the year you turn 71. However, say financial planners, it is possible to withdraw your money before then, if appropriate for your situation.
Ultimately, the decision on when to withdraw will be part of a deaccumulation strategy, says Paul Duxbury, a certified financial planner with Duxbury & Associates in Cambridge, Ont.
As Ayana Forward, an Ottawa-based certified financial planner with Retirement In View explains, a good time to start looking into the options for your RRSP is around age 65, or when you’re deciding when to take your CPP or OAS benefits.
“That’s where a financial planner can really sort of help decide when to start taking things out,” she says.
There are 3 options for RRSP funds:
- Withdraw the full amount at once, which will come with tax implications;
- Convert it to a Registered Retirement Income Fund (RRIF);
- Purchase an annuity.
The best option, says Forward, depends on the client and her particular situation, namely whether she needs the money sooner rather than later, or if the RRSP funds are her primary source of retirement income.
If someone needs a guaranteed income stream for life, an annuity might make sense. With an annuity, the individual gives the funds to an insurance company, and receives regular, guaranteed payments in return.
However, in most cases, Forward says, an RRIF is the more flexible option. As the Ontario Securities Commission notes, the RRIF is an account registered with the federal government that gives you a steady income in retirement.
Indeed, although individuals have to start withdrawing from an RRIF the year after it’s opened, the good news, say financial planners, is that they have fair amount of say when it comes to frequency of withdrawal and what to invest in.
The RRIF minimum annual withdrawal rate is set in stone, based on a formula, and increases each year. For example, those aged 71 are required to withdraw 5.28 per cent, rising to 5.82 per cent by 75. Married couples can also use the younger spouse’s age for the minimum withdrawal. There is no maximum withdrawal rate.
Some may need these funds to help with cash flow, while those who don’t need it may explore other options, such as moving the funds into a TFSA, says Forward.
“You usually have to pay tax on that withdrawal, but if you want to continue investing on a tax-sheltered basis you can move some of the money up to your limits right to the TFSA,” she adds.
You also get to decide how frequently you want to receive payments from a RRIF. “You can do it annually, you can do it as one lump sum at the beginning of the year or the end of the year, you can do semi-annual, monthly or quarterly,” she says.
As you move from a growth focus in the RRSP to a capital preservation and income focus within the RRIF, it’s important to take review your asset allocation. This might involve more cash, bonds, and blue chip-style equities, or REITs and dividend paying stocks.
“You can actually still invest the RRIF the same way you can invest your RRSP. You can put it in any one of a multitude of investment options, it doesn’t have to be GICs or anything like that,” says Duxbury.
Know your tax bracket as you consider how much to withdraw from your RRIF. Your RRSP issuer will not withhold tax on amounts transferred directly to a RRIF or funds used to purchase an annuity. However, once you start receiving payments from the RRIF, withdrawals are fully taxable as income. Any amounts withdrawn in excess of the minimum will be subject to a withholding tax.
“I always suggest trying to get a tax estimate at the beginning of the year where you’re going to be 72, so you don’t run into a surprise tax bill the following April,” advises Forward.