RRSP Q&A: How can I get better returns on my funds?

From February 16 to 19, 2010, MoneySense.ca’s top financial planners are answering your RRSP questions. For the full list of questions answered — or to submit a question of your own — click here.

I’m 62 and have RRSP mutual funds (6 digits). How can I get a better returns and still take some income to add to the widow’s pension and CPP I now collect?

All are with the same fund firm since 2001 and according to them I’m free to do anything with them because “we’ve already made all our money off you.” Is it better to get out and take 30% tax hit now and move to ETFs or dividend stocks? I also have some cash and some RRSP GIC’s. —Penny

Karin Mizgala: It doesn’t sound like your investment advisor really cares about strategic planning with this money since “he’s/she’s made all the money off you.”  I can only assume that you were in deferred service charge (DSC) mutual funds and the time line over which you would have incurred a penalty for switching or cashing out is now past.  This doesn’t mean that you should cash out your pot of money.  Although you mention a 30% withholding rate, if your RRSP’s are in the 6 figures, I can assure you that your rate could be as high as 46.41% on some of the withdrawal depending on your current earnings and on how much is actually in the RRSP.

If you need money, you may wish to do one of two things:  either convert your RRSP to a RRIF now, which will not attract tax on the whole pot of money.   You will only pay tax on the amount that you must withdraw annually.  A RRIF requires you to withdraw a certain amount each year depending on your age.  Typically, the first withdrawal will occur the year after conversion.

As an alternative, you could withdraw a certain amount from your RRSP each year until you have to annuitize your RRSP (meaning either convert to a RRIF, cash out completely, or buy an annuity).  In this way you can control the amount of the withdrawal which could result in you taking either more or less than you might otherwise receive if you converted to a RRIF today.

The other issue is the investment of your money.  I would get another advisor first and foremost and do it as soon as possible.  Ask friends and family for referrals.  Also, try to stay away from DSC mutual funds or you will be in the same boat that you were in several years ago waiting for the time line for charges to disappear.

Within an RRSP or RRIF, you have the ability to invest in virtually any investment be it dividend paying stocks, ETFs, or segregated stocks.  If you are not investment savvy, you may wish to use a full service broker who will truly look after your interests.  If you are savvy, a discount broker might be the best bet.

In addition, talk to your tax specialist.  There are a number of issues here that have tax implications and you should understand them before you do anything.

Next question: I’m a student, should I use the RRSP deduction now?

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