RRIFs, annuities and other RRSP maturity options: understanding tax and investment considerations is essential

Money Digest, Nov, 2002 by Ted Canning

Your financial strategy for retirement shouldn't end when you mature your RRSP. The challenge is to keep your money working for you throughout your retirement.

There are three major routes you can take when you mature your RRSP, which by law must be by the end of the year in which you reach 69 *. You can take the cash, put the funds into an annuity, or open a Registered Retirement Income Fund (RRIF).

Taking the cash is generally not a good idea and has two major disadvantages. First, it will all be immediately taxable--probably at a high rate. Second, since you won't likely need most of the money immediately, you should keep the majority of it earning for you (the tax sheltered status of the plan will be lost).

You can avoid these problems by utilizing two other RRSP maturity options. You can put your money into an annuity, since the government will not tax your RRSP assets if you do this (the annuity income will be taxable as received). Term-certain annuities specify exactly over how many years the payments will be receivable. Life annuities make payments to you as long as you live, or you or your spouse live under a joint plan.

You can also transfer your RRSP funds to a RRIF, without paying tax (RRIF income will be taxable as received). RRIFs are much like RRSPs in that growth within the plans are tax deferred. The major difference is that there is a minimum amount that must be removed from the funds each year.

With a RRIF, you can take out more than the minimum, which is a significant flexibility advantage, although that will mean smaller payments later on (the excess amount is subject to withholding tax. The same RRSP withholding tax rates also apply to the RRIF withdrawals exceeding the minimum amount). For instance, this may allow you to index your payments using inflation estimates, or have larger payments earlier if you don't expect to need the payments latter. Upon your death, all remaining RRIF value becomes fully taxable unless rollover or other provisions are applicable. Any remaining RRIF funds can go to your heirs once taxes, if any, have been paid.

The size of the annuity payments are determined, in part, by the interest rate at the time the annuity is set up. However, since RRIFs allow you to control how you invest your money, you can take advantage of different investments depending on the stage of the economic cycle. As well, if you don't take large payments at first, a RRIF may earn considerably more for you over the long run.

To determine whether an annuity or RRIF is better for your retirement, you may want to talk to an Investment Adviser.

* If you turn 69 this year, then you must choose an RRSP maturity option before December 31 of this year.

Ted Canning is a Investment Adviser with CIBC Wood Gundy (York Region, ON Branch). Phone 1-800-225-9839.