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Wrapping up your RRSP
Your retirement plan must be closed out by a set date. What are your options then?
David Phipps doesn't understand why many people think that once they close out their RRSP, they won't have as strong a need for their investment portfolio to keep growing as they did in the years preceding.
Your registered retirement savings plan must be terminated by the end of the year in which you turn 71. For many Canadians, this means converting their RRSP into a registered retirement income fund (RRIF), another form of tax shelter that carries its own set of rules and regulations.
Mr. Phipps, a certified financial planner with Assante Capital Management Ltd. in Ottawa, says many investors are confused about how to approach an RRIF. "A lot of people are under the impression they [should] have one investment strategy when they had money in their RRSP, and then all of a sudden change that strategy when they convert to a registered retirement income fund," he says.
But "there's nothing magical that changes in someone's situation. Consequently, the structure of the investments should probably be very similar to what they had in their RRSP," Mr. Phipps says.
An RRIF is well-suited for continuity in your investment philosophy. You can simply roll your existing retirement plan into an RRIF without incurring immediate tax consequences - a key reason why a retirement income fund is the vehicle of choice for many Canadians when it comes time to wrap up their RRSP.
Autonomy is another reason people choose RRIFs, along with their flexibility compared to other options, says Cherith Cayford, principal of CMG Financial Education in Victoria.
The two other main options are to liquidate the proceeds of your RRSP, or invest some or all of the proceeds in an annuity. For the vast majority of people, converting their RRSP into cash doesn't make sense because it would likely incur a huge tax bill.
An annuity, on the other hand, provides a fixed return over a period of time, usually monthly for the rest of your life; the payment is determined by actuarial calculations based on factors such as the amount of principal, interest rates and life expectancy.
Investors who choose annuities should realize they are "giving over their money to the life insurance company, so they are no longer in control," Ms. Cayford says. "I don't think somebody should just hand their portfolio over to a professional and leave it entirely in their hands to manage. They need to take responsibility because nobody cares more about their money than they do."
Key RRIF points
If you decide to move your retirement assets into an RRIF, there are three key points to keep in mind:
- First, once proceeds from your RRSP have been converted into a RRIF, no more contributions can be made into that plan, although your investments continue to earn interest on a tax-deferred basis.
- Secondly, you must withdraw a minimum percentage of your RRIF each year beginning the first year after it is established; the withdrawal amounts follow a prescribed schedule that increases with age (for example, 7.48 per cent at age 72, rising to 20 per cent for age 94 and over).
Of course, you may withdraw more than the prescribed amount at any time, for whatever reason your like.
- Third, you may convert all or part of your RRIF to an annuity at any time. But once money is put into an annuity it must remain there and cannot be withdrawn.
Along with pure financial considerations, experts stress that you should consider your estate when deciding what to do with your money, post-RRSP.
If you choose an annuity, for example, you can elect to leave some money for your spouse after your death, but you usually have to accept a lower monthly payment to include your spouse in the actuarial equation. In contrast, money and assets left in a RRIF automatically go to your estate.
"For somebody who has a spouse, it could be very important they not lose that capital," Mr. Phipps emphasizes.
Because interest rates have been low for the past decade, many investors shunned lower-paying, lower-risk annuities in favour of RRIFs, where they could hold a assets such as stocks. But with the market collapse of 2008, tens of thousands of older Canadians have seen the value of their portfolios plummet.
In the federal budget last month, the government recognized this harsh reality by allowing RRIF-holders to withdraw only 75 per cent of the usual required minimum amount for 2008. For example, if an investor was supposed to withdraw $8,000, according to the set schedule, he now has to withdraw only $6,000.
(If an investor had withdrawn the full minimum before the change was announced, and thus "overpaid" by 25 per cent, that amount can be redeposited into the RRIF up to 30 days after the budget legislation becomes law.)
Another problem with the current economic climate is that many people must sell equities to cover the minimum withdrawal. Given the steep drop in many stocks, this could take "a bigger bite" out of their portfolio than would otherwise be the case, points out Loren Francis, a portfolio manager with Cumberland Private Wealth Management Inc. in Toronto.
That's why many advisers are recommending that investors in that position should instead make an "in kind" withdrawal from their RRIF by simply transferring to a non-registered account the stocks and other assets used for the minimum payment.
They would still make their minimum withdrawal, and pay any tax owing. But this way, investors can also "hang on to the stock and hope the value comes back, as opposed to liquidating and realizing a loss," says Robert Snowdon, a chartered accountant in Kanata, Ont.
One way to avoid this kind of problem is to ensure that you have sufficient liquid assets available to be cashed out first so equities don't have to be touched. Or better still, perhaps keep equities outside your RRIF if you have the luxury of maintaining both registered and non-registered retirement funds.
Special to The Globe and Mail