Retirement income beyond your RRSPs – is it time for a change?

You're retired and, over the years, you've done a terrific job of contributing money to your Registered Retirement Savings Plan (RRSP). Maybe you've needed some of that money to support your retirement lifestyle; maybe not. Either way, if your 71st birthday is approaching, you've got some decisions to make about the money in your RRSP – and they can't be put off.

By December 31st of the year in which you turn age 71, the federal Income Tax Act requires that you must convert your RRSP into something that produces income. You have no choice – your RRSP must mature – but you do have choices about where you want that money to go. Making the right choice can have a big impact on the amount of tax you will pay and the financial comfort of your remaining retirement years. To help you make the best decision for your situation, here are your four basic choices and the essential pros and cons of each:

  1. Cash in your plan: If you cash in your RRSP, its full value immediately becomes taxable. You'll likely pay tax on the entire amount at the highest marginal rate. This is the least advisable choice.
  2. Buy a life annuity: A life annuity will pay you a specified income, usually monthly, for the rest of your life. It's a simple choice, but a major drawback can be that you are stuck with it for life. You can't change your mind later and choose a different annuity if interest rates increase after you purchase it, and your payments will never rise to offset the income-eroding effects of inflation or increased living costs. In addition, when you die, the payments will normally cease, leaving nothing for your estate.
  3. Buy a term-certain annuity to age 90: This type of annuity guarantees payments until you turn 90. If you die before then, the value of the remaining payments will be paid to your estate or directly to your beneficiaries.
  4. Convert your RRSP to a Registered Retirement Income Fund (RRIF): RRIFs are the number one choice of Canadians by far. They operate like an RRSP, but in reverse. Instead of putting money in, you take it out on a regular basis. You also retain control over the investments in your RRIF, and can review and revise the asset mix to help offset the effects of inflation. Your RRIF payments are usually taxable and there is a minimum annual withdrawal required each year. Other than that, you can choose to receive RRIF income each month, quarterly, semi-annually or annually, depending on the terms of the RRIF plan that you choose.

There are certain advantages to consolidating your registered investments into a single annuity or RRIF. Your administration costs are usually lower and there'll be a lot less paperwork to deal with. But the choices you make have to be right for you. Your Investors Group Consultant can provide invaluable assistance in helping you make the correct choices for your retirement income needs.

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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.

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