Getting an income from your RRSPs
Jack and Diane have saved for years for their retirement. They took advantage of RRSPs and now have a substantial amount of savings in their tax-deferred plans. As the planned date for retirement gets closer, they are uncertain of the best way to get income from their RRSPs. Jack and Diane must each deal with this issue before December 31st of the year in which they turn age 69.
The best strategy for their RRSPs is to leave them alone until they actually need the income. If Jack and Diane have other sources of retirement income or non-RRSP investments, they should use those funds first to allow their RRSP savings to continue to grow tax deferred.
When it is time for Jack and Diane to start receiving income from their RRSPs, they have the following choices:
Take the money and run - They can withdraw all or a portion of their RRSP funds (except "locked-in" funds). This is usually not the best thing to do as funds will be heavily taxed. Also, because the money is no longer registered, any earnings will also be taxed. Transfer to a RRIF - Jack and Diane can move their RRSP funds into a Registered Retirement Income Fund (RRIF). Different rules apply to locked-in funds (funds that previously came from a pension plan) and vary from province to province.
Jack and Diane can control the amount they withdraw each year, subject to a minimum set by Canada Revenue Agency. Because there is no maximum on withdrawals, there is a risk that funds can be depleted too soon.
Buy an annuity - An annuity can provide Jack and Diane with a guaranteed income for life or to age 90, depending on the type chosen. Single life annuities pay an income for the duration of one life. A joint life annuity will provide payments during the lives of both of them. They can also add a guarantee that payments will continue for a certain period, say ten or fifteen years, if the annuity income recipient(s) dies to soon.
Annuities provide guaranteed payments and require no investment management. However, Jack or Diane will not be able to make changes to the income amounts nor make lump sum withdrawals.
Use a combination - Jack and Diane are not restricted to making only one choice. They can use the guaranteed income of an annuity to meet their day-to-day income needs and a RRIF can be used as liquidity for such things as emergencies, opportunities and travel. In times of low interest rates, they may want to purchase a RRIF and convert to an annuity when rates are better.
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