Are You Turning 71?
Should you convert your RRSP into a RRIF or an Annuity?
If you are turning 71, you will receive notice that you must convert your RRSP into a RRIF or annuity by the end of this year.
The Canada Revenue Agency (CRA), requires that you cash in or convert your retirement savings into an income stream by the end of the year in which you turn 71.
What are your options?
There are three ways to do this:
- You can withdraw your retirement income from your RRSP in cash. The problem with this option is that the full amount of the withdrawal will be added to your income for this year, and you must pay tax on it. Because the amount of the withdrawal will likely be substantial, it will mean that most of your savings will be taxed at the highest rate.
- You can use your funds to purchase a registered annuity from a life insurance company. Annuities are ideal if you want to cover your fixed expenses, if you're concerned about outliving your retirement capital, or if you don't want to make on-going investment decisions.
- You can transfer your funds to a registered retirement income fund (RRIF). RRIFs allow investors to continue to manage their investments.
Does a RRIF or Annuity Pay More?
Whether RRIFs or annuities will pay you more in the long run depends on a number of factors including your age, interest rates, and the rate of return generated by your RRIF.
Other factors to consider when you convert your RRSP are:
- Your health (including that of your spouse)
- If preservation of capital for your children is a concern
- How involved you and your spouse want to be in the management of your investments.
What Are Your Retirement Goals?
- Maximize income?
- Delay receipt of money for as long as possible?
- Capital appreciation?
- Indexed income to offset inflation?
The Basics of a RRIF
A RRIF is basically an extension of an RRSP, with some important differences:
- Once you have commenced your RRIF, you cannot make further contributions from earned income.
- You must make withdrawals, subject to prescribed minimums, every year for the rest of your life or until all the funds in your RRIF are withdrawn.
The Basics of an Annuity
An annuity is, in essence, the reverse of a mortgage.
In the case of a mortgage, you borrow a lump sum, then over a fixed period of time, repay the capital together with interest.
In the case of an annuity, you lend the lump sum to a financial institution which, over a fixed period of time or your lifetime, repays your capital together with interest.
Advantages of RRIFs
- You retain personal control of your investments.
- You can change the amount of your income.
- You can make lump sum withdrawals at any time.
Advantages of Annuities
- A life annuity guarantees that you cannot outlive your income.1i>
- Annuities usually pay higher incomes than RRIFs.
- Neither you nor your spouse are required to make any investment or management decisions.
- You can spend every income payment without worry because your future income is guaranteed.
Disadvantages of RRIFs
- You may outlive your RRIF income.
- Your capital may diminish more quickly than planned because of lump sum withdrawals or poor investment performance.
- Your RRIF requires continuing investment management decisions.
Disadvantages of Annuities
- Most annuities cannot be cashed or altered after income has commenced.
- Payments cannot be adjusted to reflect changing needs.
Which is better a RRIF or an Annuity?
If you decide that a registered annuity might be a good idea, then ensure you consult someone who sells both annuities and RRIFs, otherwise, you may get just part of the story.
RRIFs are sold by most, if not all, financial institutions but life annuities are generally available only from life insurance companies. Some banks and trust companies will tell you they sell registered annuities but usually they only have term certain annuities payable to age 90. You may feel you that you're not likely to live beyond age 90, but why take the chance when you can get a life annuity that is guaranteed to age 90 and continues payment for as long as you live thereafter for almost the same amount of income? If you are not concerned about the age 90 guarantee, the life annuity with a shorter minimum guarantee will pay you considerably more.