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All trading basics

Taxes at Retirement

Contributing to a Registered Retirement Savings Plan (RRSP) is the first step in planning your retirement. At this stage of life, it's crucial to use the current tax rules and find out if you are eligible for a tax credit.

You can withdraw money from your RRSP anytime before December 31 of the year in which you turn 71, which is the last year you may contribute. This year also marks the deadline to transfer your RRSPs into a Registered Retirement Income Fund (RRIF) or annuity, which you can do any time before your 71th birthday.

To get the most out of your accumulated capital, it is a good idea to plan your spousal RRSP withdrawals. You should also evaluate the pros and cons of withdrawing your RRSP savings.

Do RRSP Withdrawals Entitle You to Tax Breaks?

No. However, RRIF withdrawals, as well as annuities received via RRSPs, RRIFs or retirement funds do entitle you to a tax break on the first $2,000 you get each year (conditions depend on whether it's provincial or federal).

If a taxpayer doesn't draw an annuity from a retirement fund, he or she would have to convert the RRSP into a RRIF or annuity before the age of 71 or cash at least $2,000 to get the tax credit.

Age 71: Your Last Chance to Contribute!

December 31 of the year you turn 71 (or, if it's a spousal RRSP, the year your spouse turns 71) will be your last chance to contribute to your RRSP and decrease the unused contribution room accumulated since 1991. You decide if the contribution is to be deducted in the current year or in following years, whichever is more beneficial to your annual taxable income.

RRSPs or RRIFs?

RRSP withdrawals are better suited to people who need cash only occasionally. RRIFs are ideal for people who make monthly or quarterly withdrawals and they help you avoid administration fees, regardless of how many withdrawals you make in a year. You can convert your RRIF into an annuity at any age or even reconvert it into an RRSP if you haven't yet turned 71.

The main difference is the requirement to withdraw from a RRIF a minimum annual rate set by the tax laws, according to the age of the annuitant or spouse. Any amount above the minimum can be withdrawn by the annuitant as needed, and this may vary from year to year.

Converting Your RRSP Into an Annuity

An annuity is a contract with a life insurance company or a trust company. In exchange for your RRSP, the insurer agrees to pay you at regular intervals, an amount of money that is determined by your gender and age, the current interest rate and guaranties that are added to the contract.

You can choose between a life annuity (guaranteed for life) or a fixed-term annuity (until the annuitant reaches the age of 90). You can also convert only part of your RRSP into a RRIF and part into an annuity

Planning Withdrawals From a Spousal RRSP

The main goal of planning as a couple is income splitting for withdrawals, where you have to respect the "three-year rule".

The contributing spouse cannot invest in the other spouse's RRSP during the year of withdrawal or in the two previous calendar years (the contribution dates count, not the deduction year). Thus, when the spouse is ready to make a withdrawal, it is best to contribute before the end of the calendar year instead of in the following 60-day period. For example, if a spouse contributes $2,000 to a spousal RRSP in February 2011, and the recipient withdraws before 2014, the contributing spouse will be taxed up to $2,000 on the withdrawals, even if the February 2011 contribution was deducted for the 2010 taxation year. The same contribution made in December 2010 would mean that the recipient is taxed on withdrawals made before 2013.

Withdraw From Your RRSP or From Your Non-RRSP Savings?

Often, retirees are advised to withdraw from their RRSP after using all their non-RRSP savings, only to leave it for their estate. Depending on the family situation, the size of the RRSP and income and on the marginal tax rate, it may be best to withdraw from the RRSP first.

A single person's RRSP or RRIF may be subject to a high tax rate for the year of death, while withdrawals made during his or her lifetime may be subject to lower rates. One must evaluate the taxable income of coming years and the effect on the income of the year of death to make the RRSP withdrawals at the lower tax rate. By reinvesting the withdrawals, one could earn dividends or capital gains, which are always taxed less than interest income. This advantage has no effect on RRSP investments since no distinction is made between types of income, which are fully taxable when withdrawn.