You’ve been contributing to your RRSP throughout your career and now it’s time consider reversing the flow of funds; leveraging your RRSP as an income source to help fund your retirement. Decumulation of assets and navigating retirement cash flows is a complex puzzle. The RRSP is an important and often materially significant piece. What are your options?
First note the RRSP cannot carry-on indefinitely. By December 31st in the year you turn 71, your RRSP must be closed. You have 5 options on what to do with the funds contained therein:
- Full withdrawal: technically an option but likely not the ideal decision due to the taxable nature of RRSP withdrawals
- Registered Retirement Income Fund (RRIF): the overwhelmingly popular choice involves converting your investments into a RRIF. The most flexible of your options, a RRIF allows for continued tax-deferred growth and flexibility of investment choices and income streams. Minimum withdrawals must be made annually from the RRIF dependent on your age (or that of your spouse) and a withholding tax will apply to any withdrawal in excess of this minimum.
- Life annuity: offered through life insurance companies, a life annuity creates a fixed income stream similar to a pension that is guaranteed for life. Payments can be fixed or indexed to compensate for cost-of-living increases, but will cease once you pass away.
- Fixed-term annuity: similar to a life annuity offering fixed or indexed payments, but instead for a fixed term (5, 10, 15, 20 years) not to extend past the age of 90.
- Hybrid: your options are not all or nothing; a retirement income plan can synthesize any combination of the above options.
While there may be a deadline for a decision with regards to RRSP funds, many of the options above can be implemented prior to age 71 for tax minimization strategies or as personal circumstances require. Annuity and RRIF income (but not RRSP withdrawals) qualify for the $2,000 pension income tax credit, available to those 65 and older. Should you have no other pension income sources, an early partial RRIF conversion could be an appealing strategy to access this credit for an additional seven years (65-71 inclusive). Triggering taxable income through an annuity, partial RRIF conversion, or direct withdrawals from an RRSP is a viable strategy prior to 65 if you’ve been able to retire early with little other income. After considering the investment income of their non-registered portfolio, it’s not an uncommon planning strategy for a 60-year-old retiree with no pension income to withdraw $5,000 – $10,000 annually from their RRSP. The first $14,398 of income is tax-free, after all.
Planning your retirement income streams can be a stressful endeavor. Your wealth advisory team at Welch LLP can outline the options available to you and recommend strategies to help optimize retirement cash flow and bring you peace of mind.
