RRIF countdown for all 69’ers

If you’re turning 69 in 2000, make sure you put a big red circle on your calendar around the last day of the year. Obviously it’s New Year’s Eve, but more important, it’s your last chance to convert your Registered Retirement Savings Plan.

If you don’t act by Dec. 31 of the year you turn 69, your RRSP becomes deregistered and the entire amount will be treated as income. And your new year won’t be so happy when you look at your tax bill.

However, there are ways of saving your RRSP from the prying hands of Revenue Canada. You have three options:

  1. Make a lump sum withdrawal
  2. Buy an annuity
  3. Transfer the funds into a Registered Retirement Income Fund (RRIF).

You’ll need to investigate a number of factors to choose the option best suited to you:

  • Your present age and health
  • Your resources available in addition to your RRSP
  • Income tax implications
  • Inflation
  • Whether you want to leave an estate.

After considering these options, speak with your financial adviser, banker or planner – they should contact you, anyway. Try to transfer your funds well before the Dec. 31 deline as, with everyone busy or on holidays, you may not get the attention or time to make the best choice. Also remember to make your final RRSP contribution by December 31, provided you still have earned income.

Option #1: Lump Sum Withdrawal

By converting all of your RRSP to cash you will, of course, have to pay tax on the entire amount. This option is only worth considering if you need money immediately and should only be done if your RRSP is small.

Option #2: Annuity

An annuity is a contract where you pay a sum of money to an insurance company. The insurance company, in turn, agrees to pay you a guaranteed sum of money each month for a period of time – usually a lifetime.

The advantage of an annuity is that you defer your taxes and you can never outlive your capital – you have a guaranteed income for life. It offers the retiree simplicity and predictability. There are drawbacks, the primary one being that when you die, the annuity ends.

You can buy an annuity which has estate value but they are more expensive in terms of annual payments and the amounts you receive are smaller. Perhaps the greatest drawback, however, is that you forfeit control of your money. The amount you receive depends on the interest rates at the time you purchase the annuity. If interest rates increase, you cannot switch to a higher interest bearing annuity. As well, there’s nothing to protect your annuity against inflation.

So, when you’ve weighed the pros and cons and decide to buy an annuity, you have two options:

  1. Term Certain: This annuity pays a monthly sum for a fixed period.
  2. Life: This annuity pays a sum for life, and may be set up as a joint for life of surviving spouse.

Option #3: Registered Retirement Income Fund (RRIF)

Because this is easy to do and you don’t have to sell anything, RRIFs have become the most popular option. It works like an RRSP by giving you flexibility — you have the option of buying an annuity later if interest rates increase.

The two main differences between RRSPs and RRIFs are that you cannot contribute to your RRIF, and you must make regular minimum withdrawals.

RRIF benefits

The amount of withdrawal depends on your age or the age of your spouse. The funds you leave in the RRIF can earn income – tax-free – until you decide to withdraw them. This growth depends on what you invest in them. For example, if they’re mutual funds or stocks, you will also have capital growth.

Unlike the annuity, you have greater ownership over your money. You can control the timing and amount of withdrawal as long as you meet the minimum withdrawal each year. You may also leave the balance of the RRIF to beneficiaries upon death. In fact, you may be able to defer tax as long as possible by delaying your withdrawal until the end of the year following the year you set up your plan.

RRIF drawbacks

The drawback to a RRIF is that you must always remain on top of your financial situation. Because you are, in effect, paying yourself a salary, you must know how much money you have and how long you think it will last — there’s always the risk of withdrawing too much money too early, thereby depleting your retirement base.

For greatest flexibility, some people find it beneficial to purchase an annuity to cover their fixed expenses and to RRIF the remainder of their RRSP.

The following chart outlines the minimum percentage of your total RRIF that must be withdrawn depending upon your age:

Your age or your spouse’sRequired annual minimum withdrawal (%)

Same for each year after 94 for RRIFs established after 1993.