Area of Law: Tax Law
Answer # 183
RRIFs: RRSP maturity option for seniorsRegion: Ontario Answer # 183
When you reach the age of 71, you are no longer allowed to contribute to your RRSP. According to the rules of Canada Revenue Agency, you must start to take minimum annual withdrawals from the total amount you have saved. These withdrawals will be taxed as income. You must decide what type of withdrawal you would like to make by December 31st of the year you turn 71. You have three basic options.
First, you can withdraw the entire amount from your RRSP in cash. This withdrawal will be treated as income, and you will be taxed accordingly. If you have saved a large amount of money in your RRSP, it may be a better idea to choose an option that allows you to make smaller periodic withdrawals, so that you will be in a lower tax bracket. If you do not decide about what you would like to do with your RRSP funds by December 31st of the year you turn 71, your RRSP will be deregistered and the entire amount less withholding tax will be paid to you. This amount will be considered taxable income for the year following the December 31 deadline, and you will be taxed accordingly.
Small periodic withdrawals
Second, instead of withdrawing the entire amount of your RRSP in cash, you may want to make smaller periodic withdrawals. There are two ways to do this. You could use your RRSP funds to purchase an annuity, or you could transfer your money into a Registered Retirement Income Fund (RRIF), which also provides an annual income.
An annuity is an investment which guarantees that you receive an income in the future. Annuities are usually sold by life insurance companies. The company will pay you a certain amount of money periodically. If you buy an annuity, you will receive a guaranteed income for the rest of your life (or that of your beneficiaries). However, an annuity also locks-in your investment, and if interest rates are low, you cannot move your money to a more lucrative investment.
The third option is to transfer your money into a Registered Retirement Income Fund called an RRIF. An RRIF will also provide an annual income, but it gives you more control over how your money is handled than an annuity does. You have the option of leaving your money in the same investment it was in when you had the RRSP. You can still earn the same rate of interest on your investment, and the money you make on your investment is still tax sheltered as long as it is in your RRIF.
The main difference between an RRIF and an RRSP is that with an RRIF you cannot contribute to the investment, and you must withdraw a minimum amount every year. The income you receive from your RRIF is included on your personal income tax form, and is taxed at your personal rate. The minimum annual withdrawal for people under the age of 71 is determined by a calculation that uses the age of the RRIF owner and the amount of money in the RRIF at the beginning of the year. After the age of 71, the minimum withdrawal amount is determined by a standard payment schedule, which is available from your investment or financial advisor. There are no limits on the maximum withdrawal you can take from your RRIF.
If you have locked-in RRSP funds, they cannot be transferred to a regular RRIF or withdrawn as a lump-sum. In Ontario, they must be transferred to a Life Income Fund (LIF), or an annuity when you reach 71 years of age.
For general information, contact Canada Revenue Agency.
For legal advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP
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