What happens when you turn 71?  You must collapse your RRSP into an approved retirement income option by the end of the calendar year in which you turn 71.  It’s important to remember that if you do no take action, the financial institution that holds your RRSP will be required to collapse it for you according to Canada Revenue Agency (CRA) regulations.  You would be taxed on the full amount in a single year.

How do you get your money out an RRSP?  Recently, I did a presentation, to a group of retirees, on Registered Retirement Income Funds (RRIFs).  We discussed the general rules of the RRIFs, such as the age which you must turn your RRSPs into RRIFs (71).  Your withdrawal amounts are based on a formula.

If you are 70 years old, the minimum you must withdraw per year is 5% of the value of the plan at the beginning of the year.  In the group presentation, as discussed three RRIF strategies based on three different types of investors.

First there’s Marcus, who has enough retirement income and is worried about capital preservation and CPP claw-back.  He decides to take the minimum payment at the end of the year and base the payments on his younger wife’s age, so the minimum payment is lower.  He is looking for less income from his RRIF.

Next is Brendan, who doesn’t really need a lot more income but enjoys the additional income his RRIF can provide.  He wants to try to preserve capital but doesn’t mind it slowly declining over time to keep up with inflation, since h has other investments on which to fall back.  He withdraws the minimum for a number of years.  At age 70 his withdrawal is 5% of the value of his plan and at age 71 it increases to 7.38% of the value of the plan.  He knows that the minimum increases over time and that if he is not earning the minimum, he will be slowly reducing his capital.  He is prepared to do that for his retirement plan and knows his capital will slowly decline.  He then considers planning transferring the funds to an annuity when he is around 80 to give him a comfortable income for life.

Finally, there’s Trevor.  He doesn’t mind his RRIF depleting over time, he doesn’t have any major tax concerns, and he isn’t worried about preserving his capital for his estate. He sets up a withdrawal of 1% per month, 12% per year.  He wants the additional income now and is prepared to deplete his RRIF funds. Trevor is a more aggressive investor and doesn’t mind fluctuations in the value of his portfolio.

Each of the three investors has different paths to choose when it comes to getting their money out of their RRIF.

Which of these Mistakes are You Making with your RRIF?

1. Not deferring payment. For investors who do not need additional income, defer the payment until the end of the year so your money is tax-sheltered as long as possible.
2. Not basing income on the younger spouse. If you have a younger spouse, base the payments on his or her age.  This gives you more time to defer income if needed, especially if your spouse is several years younger.
3. Not designating a beneficiary. For couples, it is best to name your spouse, since it is a tax-free rollover upon death of one spouse.  It is also free of probate and does not form part of the estate. For single seniors who want to bequeath to their children, naming the estate can cause delays such as probate, probate fees, and withholding of tax.  If you name the children, the financial institution pays out directly to the beneficiaries and the estate or executor is responsible for paying the tax.  This may also cause another problem, if there is not enough in the estate and the executor is an outsider who may have to go back to the children and collect the tax. Proper planning is crucial for single seniors and RRIFs.
4. Not taking advantage of unused contribution room. Maximize RRSPs before you turn 70 or roll them all into RRIFs.  Unused RRSP contributions, even at the age of 69, can help save thousands of tax dollars this year.
5. Too-risky investments. Hey, this is your retirement income.  A stock portfolio is not designed for retirement income.  Look at income-generating investments for safety and security.  Plan on spending it, not growing it.  That’s what you saved the money for in the first place, isn’t it?

Tips to Help Maximize Returns in your RRIF

Make sure your investor profile hasn’t changed since you retired. 

Speak to your financial advisor about your asset allocation to ensure you have the right asset mix.

Ask you financial advisor about consolidating your registered and non-registered investments into just two accounts so that you can more easily manage your asset mix and income withdrawal.

If you need to use your capital, in most instances it’s advisable to use your non-registered assets first.  Because your registered investments are tax-sheltered, it makes sense to leave them intact for as long as possible.

If you need to take income from your RRIF, decide how often you’ll need it—monthly, quarterly, semi-annually, or annually.  If you’re only withdrawing the annual minimum payment (AMP), withdraw it at the end of the year so that you enjoy the greatest tax-sheltered growth.

If you have a younger spouse, use his or her age to calculate the AMP.  This will allow you to withdraw less.

Laddering (proportioning investment dollars evenly across bonds or GICs of differing maturities) is an effective way to make sure all of your money doesn’t come due at once when interest rates may be very low.

If you find you don’t need as much money as you thought you would, ask your advisor about changing the payment schedule to lower amounts or less frequency. Otherwise, you’ll be paying tax on money you don’t need.

Depending on your investment time horizon, personal tolerance for risk, investment knowledge, and other factors that make up your investor profile, it could be important to have some growth in the form of stocks and equity funds, or dividend income funds, in your RRIF.  This strategy may be right for you to help protect against inflation and ensure that a portion of your capital continues to appreciate.

Be diversified—it’s just as important now as it was before you retired.  When possible, keep your interest income investments in your RRIF, where they can accumulate in a tax-deferred account, and keep your growth and dividend-paying investments outside your RRIF—capital gains and dividends are taxed at a lower rate.

Finally (this may go without saying), don’t gamble with your retirement investments. Look at options to protect your investments and take a lifetime perspective.