Retirement and your RRSP

You normally have until March 1, 2017 (see topic 56) to make your 2016 contribution. However, if you turned 71 in 2016, the contribution must be made by December 31, 2016. Unless the RRSP is converted to cash (generally to be avoided, since the full amount will be taxable as income), it must be converted into a Registered Retirement Income Fund (RRIF) or life or term annuity by December 31 of the year in which you turn 71. If you want, you can do all three—you can put some of the funds into a RRIF, some into an annuity and (if necessary) withdraw a portion in cash.

Tax tip: If you turned 71 in 2016, you may be able to make an extra contribution to your RRSP for 2017 before collapsing the plan at the end of 2016. Just before you wind it up in 2016, make a contribution equal to your 2017 contribution room. The amount of your 2017 contribution room is based on your 2016 earned income. The amount contributed can then be claimed as a deduction on your 2016 tax return. This tax-planning tip requires that you have earned income in 2016. It’s important to note that the contribution may trigger a penalty of 1% per month from the date of the contribution to December 31, 2016 (see topic 58). Therefore, it would be wise to make this extra contribution as late in the year as possible.

Before proceeding with this option, you and your tax adviser should review your financial situation carefully in light of your contribution room, the amount of the contribution, the penalty tax, etc. Also, you still have the opportunity to contribute to a spousal RRSP in the future if you have earned income and your spouse or common-law partner is under 72 years of age.

 

How RRIFs work

A RRIF provides you with varying amounts of income during retirement. If the payments are structured properly, a RRIF can continue indefinitely, essentially providing income for life. Payments from a RRIF are quite flexible. You can withdraw as much as you want, although you must take a minimum amount each year. The minimum amount to be withdrawn each year is based on withdrawal factors that increases slightly each year. The withdrawal factors are being reduced starting in 2015, so less funds will be required to be withdrawn each year than before. RRIF payments are subject to tax in the year of receipt.

How annuities work

If your RRSP funds are transferred to an annuity, periodic payments from the annuity will also be taxed in the year of receipt. Annuities can be arranged to provide payments for either a fixed term (e.g., to age 90) or life. The main advantage of an annuity is that you can have some form of guarantee of the amounts you will receive.

For instance, if you opt for a life annuity, you, or you and your spouse or common-law partner, can be guaranteed a specific income stream regardless of how long either of you survive. Nevertheless, an annuity is not as flexible as a RRIF. Once you purchase a life annuity and the funds are deposited and registered, they are locked in. You generally cannot deregister or cash in the plan or amend the terms of the contract. Also, annuities are not very popular in periods of low interest rates.

Cash withdrawal from your RRSP

If you withdraw funds from your RRSP, you’ll pay a withholding tax on the amount withdrawn. The plan holder is required by law to withhold a certain percentage of the amount and remit it to the CRA. Any additional tax on the withdrawal is paid when you file your tax return for the year. If your income is very low for the year of the withdrawal, you may get a refund. There are many options available to you when you decide to cash in your RRSP. Become familiar with the various alternatives and their tax consequences so you can make an informed choice.