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Both my husband and I are 61 and plan to retire in the next 2 to 4 years. What should we consider before tapping into our retirement savings?

"You can retire but your money can't! " -- Sandra E. Foster, author

Remember the Deadline!

You are making the wise decision of planning ahead before the government starts to collect taxes from your tax-sheltered nest egg. The Income Tax Act requires Canadians at age 69 to mature their registered retirement savings plans (RRSPs), including group RRSPs and locked-in RRSPs, whether they wish to or not.

Your options and the consequences

Cash in your RRSP savings. Convert your RRSP to a RRIF Convert your RRSP to an annuity

1. Cash in your RRSP savings.

Cash means taxes. If you cash in your RRSP, and do not convert it to a further tax shelter, such as a registered retirement income fund (RRIF), your RRSP will be taxed as income in that year. The full value of the RRSP you withdraw is added to all your other income and you will end up paying more taxes than necessary. As well, when you withdraw funds from your RRSP, the financial institution is required to apply a withholding tax, which is a percentage of your RRSP.

Example:

Withdraw less than $5,000 and there is a 10% withholding tax (outside Quebec). Withdraw 5,001 to 15,000 and there is a 20% withholding tax. Withdraw 15,001 plus and there is a 30% withholding tax.

2. Convert your RRSP to a RRIF:

Converting your RRSP to a RRIF allows you to continue to defer taxes - but not entirely. Canada Customs and Revenue Agency requires you to withdraw at least a minimum amount from your RRIF each year based on your age, or the age of your spouse.

3. Convert your RRSP to an annuity:

Converting your RRSP to an annuity gives you steady, predictable income for your entire lifetime. An annuity is essentially a contract with a financial institution that gives you guaranteed payments, either monthly, quarterly or yearly. The financial institution issuing the annuity is responsible for ensuring there is enough money in your plan to pay the regular income for as long as you live.

The locked-in RRSP and the life income fund (LIF):

If you have a locked-in RRSP from the transfer of an employee pension plan, you cannot cash in the plan. When you turn 69, you have to mature the plan and this can be done by converting the locked-in RRSP to an annuity or a Life Income Fund (LIF). You can also purchase an annuity, which would give you a steady, predictable income over your entire lifetime. If you hold a LIF, you are allowed to manage the money until you turn 80, when the remaining funds may be used to purchase an annuity.

Tax Treatment

The tax treatment of a LIF is similar to a RRIF - only the money you withdraw each year is taxable.

Making Wise Decisions

As you can see, there are many options to consider before converting registered retirement savings plans. Not leaving your decisions until the last minute, and discussing the options and tax consequences with a trusted financial advisor or tax accountant is one of the most important steps you can take to ensure a comfortable retirement.

Bookmark:

Make the Most of What You've Got, The Canadian Guide to Managing Retirement Income by Sandra E. Foster, (published by John Wiley & Sons Canada, 1999), is filled with a wealth of information on smart retirement planning.