What to do with your RRSPs when you turn 71
Congratulations! You have worked hard your entire life and saved money in your RRSPs. But what happens to those funds when you turn 71? How do you get the money out? Here are your options.
Until the age of 71, you can continue contributing to your RRSPs. However, once you turn 71, you have three choices:
- Cash out your entire RRSP and pay income tax on it as income. This may not be the best option as the tax amount could be substantial, depending on how much is in the RRSP. Further, you will lose any potential tax-deferred growth and have no more money from which to draw.
- Purchase an annuity, which comes with different options. A single life annuity provides the highest income, but it ceases upon the annuitant's death. Other annuity options allow adding guarantee periods of 5 or 10 years or a spouse life for joint life payouts. This ensures income is paid out for a certain period of time after the annuitant’s death. These options provide less monthly income, but since the income is guaranteed while you are alive, annuities can be very beneficial for retirement. The biggest downfall is that you give the money to an insurance company and you don’t know how long you will collect payments. If you want your kids or grandkids to receive any inheritance, this may not be the best option for you.
- Convert your RRSPs to RRIFs and draw an income, which can be monthly or annual. This is the most common option. Once you convert those RRSPs to an RRIF, you'll have to take the minimum payment the following year, based on a percentage of your account, which is set by the government. This minimum payment requirement gradually increases every year. RRIFs are valued on December 31st of the prior year. So, in the first year you convert your RRSP to an RRIF, you will not have a minimum payment requirement. There is no maximum withdrawal amount, so you can take more if you need it.
A common myth is that at 71, you must move your RRIF investments to conservative options like GICs or bonds. This may be true for some people, depending on their risk tolerance and the value of other investments they may own. But it's recommended to make investment changes to more conservative options as you approach retirement, not just when you retire. This transition may happen over time and not all at once. Remember, you may have a long retirement horizon of 15-20 years or more. If you have everything in GICs or bonds, your savings may not keep up with inflation. A balanced portfolio with equities and fixed income can help your retirement fund stay on track with your objectives.
If you're nearing retirement and haven't talked to your wealth advisor about your options, it's a good idea to sit down to discuss your risk tolerance and financial goals.
Celeste Yuzdepski, Wealth Advisor, B. Comm, CFP®, CIM®, CFDS, FCSI®