How does an RRSP Provide Retirement Income?
Regular contributions to an RRSP will result in a substantial accumulation of savings. When you desire income, you can invest your savings in one or more of three retirement income options. You can have any number of each option.
What Options are Available?
The income Tax Act provides three retirement income options:
- Registered Retirement Income fund (RRIF)
- Term Certain Annuity to Age 90 (TCA 90)
- Life Annuity
RRIFs and life annuities provide an income that can last for the lifetime of you or your spouse. TCA 90s last until you or your younger spouse turn 90.
Funds which have been transferred from a pension plan are usually subject to pension legislation. At one time you were restricted to purchasing only life annuities with these funds.
When Can you Start to Receive Retirement Income?
There is no longer any minimum required age for the purchase of a retirement income, except with most Locked-in RRSPs and LIRAs. You must purchase your retirement income before the end of the calendar year in which you turn 69. You can make a contribution to your RRSP for that year as long as you contribute by December 31.
Is Retirement Income Taxable?
There is no tax consequence when transferring your RRSP funds to a retirement income option. You only report for tax purposes the resulting payments as received. Since the income is spread over your retirement years, so is the tax liability. If you are 65 or over in the year, your retirement income qualifies for the Pension Income Credit if you are not already qualified. Also, if both you and your spouse have separate retirement incomes, this splitting of income may reduce your taxes.
Neither RRIF nor annuity payments qualify as earned income. Annuity payments cannot be transferred to an RRSP. RRIF payments in excess o the mandatory minimum payment amount may be transferred directly to an RRSP in your name until the end of the calendar year you turn 69. This might enable you to reduce the value of a RRIF to deposit insurance limits.
Withholding Tax
Income tax may be deducted from RRIF payments, but not annuity payments. The withholding tax is at the same rates as with direct RRSP withdrawals based on the total amount of all scheduled payments from the RRIF that year that are in excess of the annual minimum amount. The withholding tax applies to the full amount of payment taken from your RRIF in the same calendar year the RRIF is opened. Thereafter it only applies to the portion of a RRIF payment in excess of the mandatory minimum payment amount for the year.
When Should You Buy?
You should convert your RRSP funds to a form of retirement income if:
- you need more cash in regular periodic payments, or
- you are 65 or over in the year and need the qualification for the Pension Income Credit, or
- you will pay a reasonable rate of tax on the income now, but may be in a higher tax bracket or subject to the Old Age Security claw back in late years.
The best time to purchase annuities is when interest rates are at the peak of a cycle.
The mandatory minimum payment from a RRIF cannot be sheltered from taxation. Therefore, you should take into consideration that purchasing a RRIF before the mandatory conversion age will increase your taxable income.
Registered Retired Income fund (RRIF)
You cannot contribute directly to a RRIF. Funds can be transferred from an RRSP, another RRIF, a Registered Pension Plan, A Deferred Profit Sharing Plan, or a commuted RRSP annuity.
Some RRIFs are similar to continuing an RRSP, with the exception that your must take some taxable payments from the RRIF. You can choose any payment level, as long as the total each year is at least equal to the mandatory minimum amount. There is no maximum payment level. With many RRIFs you can fluctuate your payments up or down above the minimum from year to year, Obviously the higher the payments you take, the sooner your funds will be depleted. RRIFs can continue for the lifetime of the holder or their spouse.
Spouse’s/Common-law Partner’s Birthdate
You can elect to base your RRIF on your spouse’s birthdate. You must make this election at the time you apply for your RRIF.
- If you choose the age of a younger spouse, you minimum payment will be lower; much lower when you spouse is younger than 71
- If you select the age of an older spouse, your minimum payment will be higher without triggering withholding tax at source.
- If both RRIFs are based on the same birth date, when one spouse passes away the survivor can combine two or more RRIFs into one, rather than having to continue with separate RRIFs.
If you didn’t make this election when you applied for your RRIF, or you marry or enter into a common-law partnership later, you can transfer your RRIF to a new RRIF based on your spouse’s age.
Minimum Payment
You don’t have to take any payment from a RRIF in the calendar year it is first funded. In subsequent years, there is a mandatory minimum payment which changes annually based on your age (or your spouse’s age if you have elected) and the total value of the RRIF at the beginning of the year.
Minimum Payment, Age Less Than 71
If your age (or your spouse’s age if you have elected) is less than 71 at the beginning of the year, the minimum payment you must receive is calculated by subtracting the age at January 1 from 90, and dividing the result into the value of the RRIF at the beginning of the year. This formula produces an increased payment each year.
