Q: I’m about to turn 71 and have RRSPs that have to be dealt with. Should I turn them into RIFs, an annuity, put them into my wife’s name (she is younger), cash them all in?
I don’t need the income as I have significant money currently parked in various GICs at various institutions that are laddered. Although they only average a little over 2%, the interest earned and my retirement package are well within the monies I need to live a lifestyle I enjoy. Any ideas?
A: By the year you turn 71, you have to make a decision with your RRSP accounts. I’ll speak to each of the options you’ve mentioned, Wayne.
Turning an RRSP into a RRIF – a Registered Retirement Income Fund – is by far the most common choice these days. When you convert your RRSP, your investments move into a RRIF account in kind/as is. So for all intents and purposes, it’s the same account, just with a different account number and of course the minimum required withdrawal rules. You can’t contribute to a RRIF either.
You have to withdraw from your RRIF a certain percentage of the year-end balance for the previous year. That percentage rises as you age. In the year that you turn 72, the minimum is 5.28%. The year you turn 80, you need to withdraw 6.58%. And in the year you turn 90, the minimum withdrawal is 10.99%. As you can tell, the increasing withdrawals force you to dip into capital over time, if not right away in this low-return environment.
The second most common alternative is to buy an annuity, Wayne, but it’s a choice I rarely see people make these days. An annuity is like buying a pension. You exchange your RRSP for a monthly payment from an insurance company based on the account balance, interest rates, your age and life expectancy. Since interest rates are low, this creates a deterrent for many people from buying an annuity. But for a conservative investor, annuities could be appealing even at low interest rates.
I find the psychological impact of handing over your money also creates hesitation. However, you can buy an annuity with a guarantee period if you want to ensure the payments continue for a certain minimum period if you die prematurely. Having a certain amount of annuity-like income, whether from private pensions or an annuity, could be a good way to insure yourself against the financial risk of living too long. So even if now doesn’t seem like the right time to buy an annuity due to low interest rates, rates seem poised to rise in the coming year and you can always convert a RRIF to an annuity in the future.
You ask about putting the RRSP in your wife’s name, Wayne. To clarify, your RRSP belongs to you and age 71 is the year you need to do something with it, regardless of your wife’s age. You can elect to convert your RRSP to a RRIF and then base your RRIF withdrawals on your wife’s age, however. So those with a younger spouse may benefit from electing to have withdrawals based on the lower age and will, therefore, have a lower minimum required withdrawal percentage.
I would be inclined to do this in all cases when someone has a younger spouse, just to ensure the widest range of options. You may choose to withdraw more than the minimum, but why force yourself to withdraw a larger amount? I’d prefer to maintain flexibility.
If you have RRSP room – either accumulated or from earned income in your 70s – you can still contribute to a spousal RRSP in your younger spouse’s name until the end of the year they turn 71, Wayne. This may or may not be a consideration for you.
You mentioned the option of cashing in your RRSP and this certainly is an option. If an RRSP is not a locked-in RRSP or locked-in retirement account (LIRA) from a pension plan – in other words, it’s a personal RRSP you’ve contributed to over the years – you can cash the whole amount in at any time. It’s not a very advantageous option since RRSP/RRIF income is fully taxable at your applicable tax rate, but it is an option nonetheless.
A couple of further considerations for you, Wayne. It may be too late for you, but for your younger wife or anyone else before age 71, it may make sense to consider withdrawals before 71. You mentioned you have other savings and a retirement package that cover your lifestyle. But RRIF withdrawals don’t necessarily have to be deferred until you need the money or need to convert your RRSP.
Sometimes, it’s best to draw some RRSP/RRIF income well before age 71 to more efficiently draw down on your investments over time. Even if it means depositing the RRIF withdrawal into another investment account because you don’t need the money. It may keep you in a modest tax bracket throughout your entire retirement instead of a low tax bracket in the early years and a high one in your latter years. It depends on things like your other sources of income, your level of income, your RRSP balance and future expenses, among other considerations.
Also, Wayne, you mentioned your GIC investments outside your RRSP. From an asset allocation perspective, you may want to consider holding your low-yielding fixed income in your RRSP (where the income is tax-sheltered) and instead hold equity investments (stocks, stock ETFs, stock mutual funds) outside your RRSP (whether a non-registered account or Tax-Free Savings Account). Interest is taxed at a higher tax rate than capital gains or Canadian dividends. But strangely, I often encounter people with equities in their RRSPs and savings accounts and GICs in their taxable accounts.
Stocks also grow your RRSP more than GICs. Since RRSP withdrawals are fully taxable, you may want to focus your lowest growth investments across your portfolio in these registered accounts.
Anyway, Wayne, food for thought. I hope I’ve helped clarify your options. And hopefully you can use some of this information to plan ahead for the potential of early withdrawals from your wife’s RRSP or the eventual purchase of an annuity if at some point it makes sense you.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.