Tax & Estate

Registered retirement income funds (RRIFs)

The Income Tax Act (Canada) (the “Act”) requires that a registered retirement savings plan (RRSP) matures by December 31 of the year in which the planholder (or “annuitant”) reaches age 71.

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At the time an RRSP matures, annuitants must choose what they want to do with the retirement savings they’ve been deferring from taxes. Three options – or a combination of them – are possible:

• Cashing in the RRSP
• Purchasing an annuity
• Converting the RRSP to a RRIF

Here’s a look at the options.

Cashing in the RRSP
When an RRSP is cashed in, the entire fair market value of the plan will be included in the annuitant’s income for the year of withdrawal and taxed at his or her marginal income tax rate. This could entail a tax bite exceeding 45% for many Canadians. So, withdrawing all RRSP funds is probably not the best way to start retirement.

Purchasing an annuity
Annuities pay a predetermined amount of annual income over a specified period. The amount paid will be based primarily on interest rates prevailing at the time the annuity is purchased. Unlike cashing in an RRSP, when an annuity is purchased, the value of the RRSP is not included in income all at once. Rather, the amount received annually will be taxed as income each year.

Converting to a RRIF
RRIF payouts are essentially the opposite of annual RRSP-deductible contributions. There are maximum annual amounts that may be contributed to an RRSP, and there are minimum RRIF withdrawals each year. The amount withdrawn from a RRIF will be taxable each year.

As with an RRSP, growth within a RRIF is tax-deferred, and annuitants may continue to manage their own investments if a self-directed plan is used.