Warning: Retirement nest egg at risk

If you, or someone you know, answer “yes” to the following three questions, you are drifting perilously close to jeopardizing your retirement nest egg:(1) Are you 69, 70 or 71 this year?(2) Do you have money in an RRSP?(3) Have you not yet converted your RRSP to a retirement income stream?December 31, 1997 is your deadline for conversion. If you miss it, your RRSP could be automatically de-registered and every single cent in it treated as 1998 taxable income by Revenue Canada.The unpleasant consequence? You risk losing as much as 50 per cent of all the RRSP money you have saved over the years.

Government rules, which have so generously allowed you to salt away tax-free money, stipulate that you must convert your plan into retirement income by December 31 of the year in which you turn 69.

The reason three separate age groups are affected this year is because the 1996 federal budget reduced the RRSP age limit from 71 to 69, and earmarked 1997 as the year of transition.

If you don’t convert, even due to illness or lack of knowledge, the government will deem your RRSP as having been cashed in — which, inact, is one of your three options. Obviously, because of the tax consequences, cashing in is not a good idea unless your RRSP is very small.

That leaves only two financially sound choices:

  1. Buy an annuity. In essence, this amounts to trading your retirement savings to a life insurance company in return for a guaranteed monthly income for life. Some people like the idea of getting a regular, set amount every month and, annuities are safe, predictable, and secure. Plus, once you buy one, no further money management is required on your part. The downside of the basic annuity, however, is three-fold: they are pegged to interest rates at the time of purchase, and, as you know, rates are at long-time lows now; you lose control of your money and cannot change your mind about this investment at a later date; and, when you die, there is no benefit for your estate — the money remains with the insurance company.
  2. Convert your RRSP into a Registered Retirement Income Fund (RRIF), the most popular choice in recent years. A RRIF is essentially a mirror of your RRSP — it affords the same tax-sheltering, it can hold the same investments, and any money remaining after death can go to your estate. The only difference is that, instead of being allowed to contribute every year, you must make a minimum annual withdrawal. This is your end of the bargain you made with the federal government in the first place — now you have to take out at least the minimum annual amount and pay tax on it.

But whatever your choice, annuity or RRIF, the all-important point is to take some action before the end of the year. Last year too many Canadians — an estimated 25 per cent of those facing conversion — did not and paid the price.

So do something about your RRSP right now if you are in one of the three age groups. I also urge you to consult a professional financial advisor. With this year’s unprecedented RRIF rush, most advisors are about to become as busy as they have ever been in their careers. In a month or so, you might not get the attention you deserve.