Turning 69? It’s time to roll RRSP to RRIF

When investors turn 69 they must decide what they will do with their Registered Retirement Savings Plan.  One option is to roll their RRSP into a Registered Retirement Income Fund.  A RRIF is essentially a continuation of an RRSP.  The difference is that a RRIF is designed to provide a source of income during retirement.

The rollover procedures are relatively straightforward.  A transfer form that is signed by the account owner is used to move the investments from an RRSP to the new RRIF account.  This transfer may be done ‘in-kind’ so that the investments move over exactly how they were within the RRSP account.  Other options include all cash or mixture of cash and securities.  Generally, we recommend transferring all in kind.  Having the accumulated funds from your RRSP rolled over into a RRIF provides the same tax sheltering as before.

RRIFs offer some important advantages, such as the flexibility to design your own pension.  Investors may elect to have payments made from the plan on a monthly, quarterly or annual basis.  Investors may change the frequency of their payments whenever they like.  Individuals may also request a lump sum withdrawal if required.

RRIF Account

When establishing a RRIF account there are a few questions that relate to the frequency of payments, how the payments will be paid, and when they will be paid.

Frequency:  How often would you like to receive payments from the RRIF?  The options are flexible but the four most common choices are monthly, quarterly, semi-annually or annually.  If you choose monthly payments then you will need to select whether to receive the payment in the middle of the month or at the end.   Semi-annual payments are generally made in June and December.  For individuals requesting annual payments we recommend December to maximize the tax deferment.

Proceeds

Individuals have more flexibility today with respect to how their RRIF payments are made.  Common choices are electronic funds transfer to your bank account or a physical cheque that can be picked up or mailed.  Many individuals decide to transfer the proceeds to their cash investment account.

Beneficiary Options

Similar to an RRSP account, all RRIF accounts require you to name a beneficiary.   Single or widowed individuals may choose to name their estate the beneficiary and let your estate be distributed according to your will.  If you name specific beneficiaries outside of your estate you are able to avoid probate fees on these assets.  Individuals with a spouse are able to roll their RRIF over tax-free to their spouse’s RRIF or RRSP after death, assuming they are named beneficiary.

Younger Spouse

For investors who do not need the income and would like to maximize tax deferral they should consider electing the younger spouse’s age, if applicable.  If you elect to use the age of your younger spouse, your minimum payment will be calculated by the age formula.  This is calculated by dividing the RRIF Value at December 31 of the previous year by 90 minus the spouse’s age.  If the spouse was 65, and the value of your RRIF at December 31, 2006 was $300,000, your minimum 2007 payment would be $12,000.  This is calculated as follows:  $300,000/(90-65).  The age formula may also be used for those individuals who choose to convert their RRSP to a RRIF prior to age 69.

Minimum Withdrawals

Minimum RRIF withdrawals are based on a percentage of the year-end portfolio value.   Investors who withdraw more in the early years will receive reduced amounts in later years.  The most important factor in setting up a RRIF and deciding on the amount of withdrawal is to make choices based on your needs.  Investors not requiring income generally select the minimum withdrawal amount.  For individuals rolling their RRSP into a RRIF at age 69 there is no minimum withdrawal amount.  The following table outlines the minimum withdrawal amounts:

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Under the old rules, RRIF accounts had to be closed when an individual reached the age of 90.  Amendments to the rules occurred in 1992, since that year there is no requirement that a RRIF account be closed.  After age 93, the annual withdrawal amount remains at 20 per cent of the previous December 31st value while the account owner is alive.