The alphabet soup of converting your RRSP to an RRIF

Deborah Leahy

June 2011

A registered retirement savings plan is a great way to save and invest for retirement. But you can’t save forever.

At some point, you’ll use the funds you’ve accumulated in your RRSP for retirement income. You can wait, but not past a certain age. Government regulations require you to wind up your RRSP by the end of the year in which you turn 71.

When it’s time to draw on RRSP funds for income, there are three basic choices: You can convert your RRSP to a registered retirement income fund, or RRIF; buy an annuity; or take the entire amount in cash. You can also combine any of these options. In reality, the first two options are the most popular, because receiving funds in cash could result in a substantial income tax bill in a single year.

RRIFs are by far the most common choice.

They offer investment and income flexibility and let you keep the same investments you held in your RRSP. They’re also widely available from financial institutions and can be tailored to meet your needs. If you want maximum flexibility, you can open a self-directed plan.

A RRIF is similar to an RRSP, only you distribute money instead of contributing funds. Your investments grow, tax-deferred, as long as they remain in the plan. Amounts withdrawn for income are taxable.

You can withdraw as much as you want from an RRIF. However, a minimum annual withdrawal is required under government regulations. This is based on your age and the value of your RRIF.

If you turn 71 this year, you should have already started the process of winding up your RRSP.

Most financial institutions require at least a month’s notice to complete the necessary transactions. Failure to wind up your RRSP by December 31 could result in the entire amount being converted to cash and considered income in one year. It would then be taxed accordingly.

The main alternative to an RRIF is an annuity.

With an annuity, you create a simple income stream, without the chore of managing investments.

You can buy a life annuity, through which you provide a lump sum to an insurance company in exchange for a guaranteed income stream for life. Payments, usually made monthly, are a combination of investment returns and repayment of part of your principal amount.

Generally they’re fixed for the term of the annuity. Some type of annuities provide payments until age 90, or offer different features.

You don’t have to choose between an RRIF and an annuity.

You can combine the two so an annuity provides a predictable income stream in retirement and an RRIF gives you a chance to exercise greater control over part of your assets.

Speak to a financial adviser before you make a retirement decision. With professional help, you can select the right income option for your needs. Deborah Leahy is an investment adviser with Edward Jones, specializing in assisting seniors.