RRSP options after retirement

All investors realize the value of the Registered Retirement Savings Plan (RRSP). Since 1957, this has been a powerful vehicle for Canadians to save for retirement. Among the benefits enjoyed by RRSP contributors include tax deductions, tax-deferred investment growth and tax deferral. However, many investors are caught unaware of their alternatives when their RRSP expires soon after retirement - when an investor turns 71 the RRSP must be closed.

Below are three of the major alternatives investors have when it comes to transferring their RRSP funds after the age of 71.

Withdrawing the funds

Many investors – especially those unaware of their alternatives in the post-RRSP years – choose this option. Depending on circumstance, this may not always be optimal. Investors who choose this option are taxed on the entire accumulated value of their RRSP. The RRSP funds are treated as ordinary income and are taxed at the individual’s marginal tax rate. Less informed investors are often astounded at the unexpected tax liability that suddenly arises.

RRIF (Registered Retirement Income Fund)

RRSP funds can be rolled over into a RRIF on a tax deferred basis. A minimum amount is then received every year, beginning one year after the RRIF is established. The minimum amount is generally taxable, and is based on a predetermined formula that considers the investor’s age and the total value of the RRIF.

A RRIF can be basically seen as a post-retirement extension of the RRSP. Similar to an RRSP, it is registered with the Canada Revenue Agency and is also a vehicle that generates tax deferred investment growth.

Life and Term Annuities

The third option is to purchase an annuity from a life insurance company. As with the RRIF, the rollover is tax-deferred. There are generally two types of annuities that can be purchased: life annuities that guarantee income for life and term-certain annuities that offer income for a predetermined duration. In both cases, income is generally taxable.

We will shift our focus to life annuities. The income received is known as the premium, which is received by the annuitant – the investor – for the rest of his or her life. The dollar amount is based on several factors, the main factor being your life expectancy. Your life expectancy is based on variables like health, family health history, gender, marital status and lifestyle. It essentially represents how long the insurance company expects to be obligated to pay you a fixed income.

Final Thoughts

It is important to note that these options can be exercised at any time – not just at age 71 – but with the benefits an RRSP provides investors would be wise to make full use of it.

The appropriateness of the three alternatives highlighted in this article differs for different investors. Much like an investor profile, specific situations and circumstances need to be taken into account – along with tax considerations. The financial advisors at GTA Wealth Management Inc. can help you develop your optimal post-RRSP strategy.

Contact or call GTA Wealth Management toll free 1 855 GTA WLTH (855 482 9584) to accelerate your ride to financial independence. A professional wealth management financial advisor is ready to serve your wealth management, tax return and planning needs. GTA Wealth Management Inc. has three convenient locations in Mississauga, Toronto and Markham to serve you.

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