CONVERTING YOUR RRSP TO RETIREMENT INCOME
When you reach the age of 71 in a particular year, you must convert your RRSP into retirement income by the end of that year, and the retirement income payments must commence in the following calendar year.
However, you, need not wait until age 71 to commence receiving a retirement income. In theory, you may start at any time, although as a practical matter you should build up your tax-deferred savings while you remain eligible to contribute, and withdraw them only when you (a) absolutely require the money, (b) require retirement income, or (c) reach 71 and must commence to receive retirement income.
When you decide to (or must) begin to receive a retirement income, you can convert your RRSP to either a Registered Retirement Income Fund (RRIF) or an annuity. No tax need be paid on this conversion.
There is a great deal of flexibility on these conversions, so long as the transfer is made directly between plans. That is, you may not withdraw the RRSP funds in cash and later recontribute them to a RRIF or annuity. You can, of course, always withdraw funds you need from your plan at the cost of including them in your income and paying tax on the result, but those funds cannot be returned to the tax-deferred retirement savings system. However, you can use your RRSP funds through direct transfer partly to obtain RRIFs and partly to obtain annuities, and you can split one RRSP among several such plans or lump several RRSPs into one such plan.
Planning Points
- Consider contributions to a spousal RRSP. These must be made based on your own contribution limits, but can result in future retirement income splitting with your spouse or common-law partner.
- If you have received special payments on termination of employment, voluntary or otherwise, having your former employer make a direct contribution of qualifying amounts to your RRSP will avoid having withholding tax levied on the transfer.
- If you have made contributions to an RRSP which you did not or could not deduct, you must be careful to ensure that your total undeducted contributions do not exceed your available contribution room by more than $2,000.
- If you are over 71 years old, so that your own RRSP has “matured” and been converted into an income plan, but your spouse or common-law partner is not over 71 yet, you can still make spousal RRSP contributions if you have business, employment, or other qualifying “earned income”.
- Taxpayers in a position to control their “earned income” should note that the contribution deductible in a particular year will be based on income of the preceding Year. Thus, to make the maximum contribution of $26,010 in 2017, you will need 2016 income of $144,500. It is also important to remember that allow-able RRSP contributions are reduced for members of registered pension plans, pooled registered pension plans, and deferred profit sharing plans.
- Since you can build up unused contribution room, it may be worth considering foregoing deductions in a year when your income is relatively low to use the deductions against higher marginal rates in a future year, especially where a substantial increase in taxable income is anticipated in the near future from events such as a large one-time capital gain. However, since the main advantage of an RRSP is the tax-free compounding of investment income inside the plan, as opposed to the tax deduction for the contribution, it is almost always beneficial to contribute to the maximum limit as early as possible.
- Taxpayers saving partially through an RRSP and partially outside an RRSP should consider which investments should be held in which form. Farm and fishing property and small business shares qualify for the capital gains exemption if held outside an RRSP. In addition, capital gains realized outside an RRSP are taxed on only 50% of the gain, and may be offset with capital losses, benefits which are lost if the properties are held in an RRSP. Accordingly, properties held for capital appreciation are not the best candidates for RRSPs. On the other hand, investments such as bonds or guaranteed investment certificates, which yield only interest which are taxed at full rates, are generally better held in an RRSP.
RRSP RETURN TABLE
| Accumulated
Value at End of year |
6% |
7% |
8% |
9% |
10% |
11% |
12% |
13% |
14% |
| 5 | $5.975 | $6,153 | $6,336 | $6,524 | $6,716 | $6,913 | $7,115 | $7,323 | $7,536 |
| 10 | 13,972 | 14,784 | 15,646 | 16,560 | 17,531 | 18,561 | 19,655 | 20,814 | 22,045 |
| 15 | 24,673 | 26,888 | 29,324 | 32,003 | 34,950 | 38,190 | 41,753 | 45,672 | 49,980 |
| 20 | 38,993 | 43,865 | 49,423 | 55,765 | 63,002 | 71,265 | 80,699 | 91,470 | 103,768 |
| 25 | 58,156 | 67,676 | 78,954 | 92,324 | 108,182 | 126,999 | 149,334 | 175,895 | 207,333 |
| 30 | 83,802 | 101,073 | 122,346 | 148,575 | 180,943 | 220,913 | 270,293 | 331,315 | 406,737 |
| 35 | 118,121 | 147,913 | 186,102 | 235,125 | 298,127 | 379,164 | 483,463 | 617,749 | 790,673 |
The above table shows the accumulated return on a $1,000 investment in an RRSP at the beginning of each year. The interest is compounded annually.