2018 Issue No. 1 January 2018 EY Wealth Insights Canada Preparing for retirement: your RRSP and you After a lifetime of planning, one of the most important financial decisions you will make will be what to do with your registered retirement savings plan (RRSP) when it is time to start receiving a retirement income. The decisions you make regarding your RRSP will go a long way to determining whether your years of savings and sacrifice will provide the income you need for a comfortable retirement. Let s take a look at some of the main questions you may be asking yourself at this important time. When do I have to withdraw money from my RRSP? You may withdraw money from your RRSP at any time. However, any money you withdraw will generally be included in your income in the year of withdrawal and so will be subject to tax at your current marginal tax rate. Therefore, when planning for retirement, most people choose not to withdraw their money from their RRSP all at once. Your RRSP will have a maturity date provided under the terms of the plan. This is the date by which you must terminate your RRSP and withdraw all the money from it, and either transfer the value of your plan to another RRSP (if your plan has not yet reached its maturity date) or select a maturity option to begin receiving retirement income. Your RRSP must mature by the end of the calendar year in which you turn 71. Therefore, if you turn 71 in 2018, your RRSP must mature by 31 December 2018 and you will be unable to make any further contributions to your RRSP after that date. However, you do not have to wait until you turn 71 to obtain retirement income from your RRSP. Should you wish to begin receiving a retirement income earlier, you can do so subject to any other restrictions you may have agreed to when you originally set up your RRSP. My RRSP is maturing: what are my options? There are a number of maturity options available to enable your RRSP to provide a retirement income from your plan assets. You can select one or a combination of these available maturity options. Each one will provide you with retirement income in varying amounts over different periods. In each case, income tax is deferred until you actually receive a retirement income from the maturity option you select. EY Wealth Insights is a newsletter that covers tax strategies and related topics for preserving wealth. For more information, please contact your EY advisor or EY Law advisor.
In addition to withdrawing all or a portion of the value of your RRSP in a lump sum, you can choose to: Purchase a fixed-term annuity These provide benefits up to age 90. However, if your spouse or common-law partner is younger than you, you can elect to have the benefits provided until your spouse or partner turns 90. Fixed-term annuities may provide fixed or fluctuating income. Purchase a life annuity These provide benefits during your life, or during the lives of you and your spouse or partner. Life annuities may have a guaranteed payout option and may provide fixed or fluctuating income. Roll your RRSP into a registered retirement income fund (RRIF) A RRIF is essentially a continuation of your RRSP, except that you must withdraw a minimum amount from it each year (but there are no maximum limits). A RRIF will provide retirement income from the investment of the funds accumulated in a matured RRSP. Which RRSP maturity option is right for me? Deciding which maturity option or options are best for you can be difficult, so you may wish to speak with your financial and tax advisors to better understand your options and the factors you should consider. In many cases, you can change from one maturity option to another at a later date; however, in certain cases you may not have future flexibility. Therefore, it is important that you understand the benefits and limitations of each maturity option. Annuities Annuities provide a predictable and guaranteed income stream. Income payments must be received at least annually, and the full amount of the annuity payments received in the year must be included in income for tax purposes. If you do not have a company pension plan or other income source that provides predictable and guaranteed payments, an annuity may be an appropriate maturity option to consider. In making this assessment, you should consider that as a result of a prolonged period of low interest rates, the payouts currently offered under annuities have also declined. Annuities typically cease making payments when the annuitant dies. The company making the annuity payments, usually a life insurance company, assumes any financial risk associated with the annuitant living longer than expected. If the annuitant dies prematurely, the annuitant generally EY Wealth Insights Canada 2
loses the right to receive future annuity payments. Options exist to continue payments for the life of the surviving spouse or common-law partner or for a minimum guaranteed period, but these options come at a cost that reduces the amount of each annuity payment you will receive. RRIFs If you have some other sources of guaranteed retirement income, or you are comfortable taking on the investment risk yourself, a RRIF may be an appropriate maturity option for you, either on its own or in combination with an annuity. RRIFs allow you to continue to invest your retirement savings on a tax-deferred basis in the same types of investments that were available to you in your RRSP. Selecting a RRIF may increase your investment risk but also provides the potential to earn additional income that can increase your retirement income in the future. You must make a minimum withdrawal from your RRIF each year, but you can also make additional withdrawals of any amount during the year should you require additional income. All payments out of a RRIF must be included in your income for tax purposes. The minimum amount you must withdraw from your RRIF is determined as a percentage of the value of your RRIF at the start of each year and will fluctuate from year to year on the basis of changes in the value of your plan. The minimum required withdrawal also increases each year in relation to the age of the annuitant. Should you die prematurely, the general rule is that you are considered for tax purposes to have received the value of the property in your RRIF immediately before your death. As a result, the value would be included in your tax return for the year of death. However, there are several exceptions that allow the tax to be deferred until a later time for example, where your spouse or common-law partner is named on the RRIF documentation as a successor annuitant. What else do I need to know about RRIFs when I m selecting a maturity option? If you are considering selecting a RRIF for your maturing RRSP, there are a few other features you should be aware of. The minimum withdrawal requirement for a RRIF is based on a formula that is dependent on your age at the start of each year. You have the option of making a one-time election, at the time the plan is established, to use the age of your spouse or common-law partner (if the spouse or partner is younger) in determining the required minimum withdrawal each year. This will lower the minimum withdrawal required from the RRIF, resulting in further tax deferral on income earned on money left in the plan. Of course, you still have the option of making additional withdrawals at any time. The following example illustrates the benefit of making the election to use the age of the younger spouse or partner to compute the required minimum withdrawals from a RRIF. Suppose you turn 71 in 2018 and invest $200,000 in a RRIF in that year, earning a 4% return in 2018 and in each following year. Suppose also that your spouse or partner is 68 in 2018, and you make the election to use your spouse s or partner s age in calculating your minimum withdrawal amounts. At the beginning of 2028, you will have over $9,300 more remaining in your RRIF than you would have had if you had used your own age to calculate the minimum withdrawal amounts. When you withdraw the minimum amount required from your RRIF each year, there will be no tax withheld on the amounts you receive. Since the withdrawals must be included in your income for the year for tax purposes, this may result in you owing tax when you complete your tax return, or may require you to make additional instalment payments yourself. If you withdraw more than the minimum amount required, tax will be withheld from the excess at the following rates: 1 Excess amount withdrawn Resident outside Quebec 2 Quebec resident 3 Up to $5,000 10% 20% $5,000 to $15,000 20% 25% Over $15,000 30% 30% Note that if you elect to withdraw the excess amount for a year via a series of instalments instead of in one lump sum, the applicable withholding tax percentage will be based on the aggregate amount of the instalments, rather than on the gross amount of each individual instalment. If you discover, when you prepare your tax return, that not enough tax was withheld from the RRIF payments you received, you will have to pay the additional tax. Alternatively, if too much tax was withheld from the payments, the excess will be refunded to you. When planning for withdrawals, it is important to make certain you have sufficient cash available within the RRIF to fund the withdrawals. Should you choose to withdraw assets in kind from your RRIF instead of withdrawing cash, the fair market value of the withdrawn assets will need to be included in your income for the year, and you must still have sufficient cash in the plan to pay the required withholding tax. 1 Sources: www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-retirement-savings-plans-registered-retirement-incomefunds-rrsps-rrifs/registered-retirement-savings-plans-registered-retirement-income-funds-rrsps-rrifs.html#rts and www.revenuquebec.ca/en/entreprises/ras/casparticuliers/typesremu/regimes.aspx. 2 Canadian residents outside the province of Quebec. 3 Residents of the province of Quebec. Includes federal withholding. EY Wealth Insights Canada 3
Finally, you may be able to withdraw funds from your RRIF tax-free or at a very low tax rate if you are entitled to various non-refundable tax credits such as the age amount and pension income amount, or you are able to split pension income with your spouse or partner. You could even find that the minimum withdrawal requirement results in you having to take out more funds from your RRIF than you need to fund your current retirement living costs. In this case, you may wish to consider depositing the extra amounts withdrawn into your tax-free savings account (TFSA), assuming you have contribution room available. This will allow you to continue to grow your investments tax-free. What happens if I don t select a maturity option by the end of the year I turn 71? At the beginning of the year you turn 72, if you have not selected a retirement income option, then your RRSP will mature and the plan will terminate. At that time, the entire value of your RRSP will become payable to you, will be included in your income for that year, and will be subject to tax at your marginal tax rate. If your RRSP has significant assets, such a result is not usually desirable, because of the high tax cost. Therefore, you should be careful to review your RRSP options sufficiently early to allow time for any planning you wish to perform and for your financial institution to process the maturity option or options you select. Tax tips If you re going to be 71 at the end of 2018, make your annual RRSP contribution on or before 31 December 2018. If you re over 71 and your spouse or partner is younger than you and you have earned income or RRSP deduction room consider making contributions to your spouse s or partner s RRSP until your spouse or partner turns 71. If you have sufficient earned income in the year you turn 71, consider making a contribution for the next year (in addition to one for the current year) just before the year-end. Although you must collapse your RRSP before the end of the year in which you turn 71, you re still able to deduct excess RRSP contributions in later years. You will be subject to a 1% penalty tax for each month of the overcontribution (one month if the overcontribution is made in December of the year you turn 71), but this may be more than offset by the tax savings from the contribution. Investigate and arrange for one or more of the maturity options that are available if your RRSP is maturing in the near future. If the minimum RRIF amount is withdrawn in a year, no tax is required to be withheld at source. Consider the effect of this on your income tax instalment planning. Consider receiving RRIF payments once a year in December to maximize the income earned in the plan. What are my options for my lockedin RRSP? Under federal and most provincial pension legislation, the proceeds of locked-in RRSPs or locked-in retirement accounts (LIRAs) must generally be used to purchase a life annuity at retirement or must be converted to a life income fund (LIF), a locked-in retirement income fund (LRIF) or a prescribed retirement income fund (PRIF). Because these proceeds originate from a pension plan that is intended to provide retirement income for your life, you generally cannot use them to acquire a term annuity and you cannot withdraw all the funds in cash. LIFs, LRIFs and PRIFs are all forms of RRIFs, so there s a minimum annual withdrawal amount. But unlike RRIFs, there are also maximum annual withdrawal limits for LIFs and LRIFs, and in some provinces LIFs must be converted to life annuities by the time you turn 80. Tax-deferred transfers are generally permitted between all these plans, so you might transfer assets from a LIF back to a LIRA (if you re under 71) if you change your mind about receiving an early pension. Another option is to transfer funds from a LIF to an LRIF to avoid annuitization when you turn 80. EY Wealth Insights Canada 4
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