Maturing an RSP
When it comes time to move from the accumulation
phase to the payout phase, there are several
maturity options available to holders of a registered
retirement savings plan (RRSP). Individuals can
design their retirement plans by combining different
payout options and, in some cases, moving between
options. While RRSP annuitants must shift to a
payout option before the end of the year in which
they turn age 71, annuitants can mature some or all
of their RRSP earlier than age 71, if they wish.
Under the registered annuity and RRIF options,
the annuitant can enter into a contract at any time
during the year they turn 71 and have the first
payment deferred into the following year.
The basic options for maturing an RRSP include:
• Deregistering the RRSP;
• Purchasing a registered annuity with the
proceeds of the RRSP; or,
• Converting the RRSP to a registered retirement investment fund (RRIF).
Deregistering a regular RRSP
Deregistering a regular RRSP means withdrawing funds from the plan, with the value of the funds withdrawn included in the annuitant’s income in the year of withdrawal. As such, the income will be subject to income tax in the year of withdrawal and will be taxed at the annuitant’s marginal rate of tax.
This type of deregistration can be done as a
single lump sum amount or can be systematically withdrawn over several years. A strategy of this nature might make sense for small RRSPs or for individuals under age 71 who may need to access the funds from time to time but who do not want to be tied to the minimum annual withdrawal associated with a RRIF.
Deregistration is the default maturing option when an annuitant does not elect to take the RRIF or annuity option by the end of the year in which the annuitant turns age 71.
The registered annuity option
The registered annuity option has many possibilities that can allow customization to specific client situations.
The annuity payment can be paid for the
lifetime of the annuitant or the joint lifetimes
of the annuitant and his or her spouse or
The annuity payment can be structured to
reduce on the first death of the joint lives
or reduce upon the death of the annuitant
The annuity can be designed with a
guaranteed minimum number of payments
that would be paid or commuted should the
annuitant pass away before all guaranteed
payments are made. The maximum guarantee
period is 90 minus the annuitant’s age.
The annuity can be for a fixed term to age
90. If the annuitant survives to age 90, the
annuity ceases. If the annuitant passes away
before reaching age 90, the annuity could
continue or be commuted, depending on the
The annuity payments are normally designed
as equal amounts, but the periodic annuity
payment could be designed to vary annually
based on the interest rate assumed for pricing,
changes in Consumer Price Index or a fixed
increase of up to 4 percent.
The annuity option is a permanent decision; once purchased, annuitants cannot change their mind if circumstances change.
The RRIF option
The RRIF option can provide RRSP annuitants with flexibility in meeting their needs over their retirement years.
A RRIF requires that annuitants withdraw a
minimum amount annually from the plan, based on a prescribed government-mandated schedule; however, annuitants are not limited to the minimum but can withdraw as much as needed at any time. Any RRIF withdrawal is subject to tax at the annuitant’s marginal tax rate.
The minimum amount that must be withdrawn
annually from a RRIF is the fair market value of
the RRIF at the beginning of the year (January 1)
multiplied by the pre-set factor that aligns with
the annuitant’s (or annuitant’s spouse’s) age at the beginning of the year. When establishing the RRIF, annuitants may elect whether the annual minimum rate is based on their age or the age of their spouse or common-law partner. The annuitant also chooses the schedule for payments, such as monthly, quarterly, semi-annually or as a single annual payment.
RRIF Minimum Payment Chart
Assume, for example, Aisha’s RRIF has a balance
of $100,000 on January 1, 2019 and that she is
80 years old at the beginning of the year. The
minimum payment Aisha must receive from the
RRIF in 2019 is $6,820 ($100,000 x 0.0682). She
must receive the $6,820 before the end of 2019 but may withdraw any amount she wishes, provided it meets or exceeds the minimum.
An individual can start with a RRIF and then, years later, use the RRIF to buy an annuity. This strategy could work for individuals who prefer a high degree of investment control during the early years of retirement but want to insure against the risk of longevity later in their retirement.
An individual can decide to change RRIF carriers
at any time. In such a situation, the first RRIF
carrier ensures that the RRIF minimum payment to the annuitant is paid for the year. The new RRIF carrier is not obligated to make a RRIF minimum payment until the following year. This approach is taken because the new RRIF carrier does not have a beginning of year balance on which to base the minimum.
Most payments made to the annuitant under any of the options are subject to withholding of income taxes at source, which would be remitted to the CRA. The annuitant reports the gross amount of income and claims the taxes withheld at source when filing his or her annual personal tax return.
The only payment that is not subject to withholding of income taxes at source is a RRIF payment based on the annual minimum. Annuitants who chose the annual RRIF minimum will not have income
taxes withheld at source, but the income is still
fully taxable at the annuitant’s marginal rate of
tax. As such, a reconciliation of taxes owing on the annuitant’s RRIF income occurs when the annuitant files an income tax return.
The legislated rate of withholding for the
deregistration option and RRIF payments in excess of the minimum is outlined below.*
• Up to $5,000 10%
• $5,000 to $15,000 20%
• Over $15,000 30%
*Excludes Quebec, which has a separate schedule.
Assume, for example, that Sarah expects to draw $4,000 per month from her RRIF this year, when her annual RRIF minimum is $6,000.
The carrier would withhold $1,050 from each monthly payment (30% x ($4,000 less ($6,000÷12))). Sarah would report $48,000 of RRIF income and $12,600 of taxes withheld at source.
Annuitants can request that more than the
minimum amount be withheld at source. This can be helpful for individuals who do not like to have a large payment due when filing their personal return or who have difficulty saving throughout the year.
Individuals might want to RRIF a portion of their
RRSP at age 65 in order to generate sufficient
eligible pension income to enable them to claim the pension income credit. The analysis should consider the extra tax paid on the RRIF payment compared to the tax savings arising from the claim for the pension income credit.
Individuals might want to RRIF a portion of their
RRSP at age 65 in order to generate enough eligible pension income to split with their spouse. The RRIF annuitant can elect to share up to 50 percent of their RRIF income with their spouse and have that portion reported by the spouse on their tax return.
The spouse would also be entitled to the pension income credit if they are age 65 or over. Understanding the breadth of options allows taxpayers to custom design a plan that best suits their needs.
Sean Schneider, BBA
The ideal way of designing your finances will change from time to time. It always depends on situation, expertise and execution.
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