For many of us, the RRSP contribution we make every year is viewed mainly as a way to reduce taxes payable, without a great deal of focus on what will be done with it in the future.  With an aging population, the focus is beginning to shift to turning those years of savings into an income stream.  So how does that work?

An RRSP is a savings vehicle designed to help Canadians save for retirement, and reduce their tax burden during their working years.  Funds cannot stay in an RRSP forever, and are designed to be turned into a future income stream.  This can be done at any time, but funds must be withdrawn by December 31, of the year in which one turns 71.

So what options are available?  Once you have decided that you wish to start receiving income from your RRSP’s, or you have reached the deadline of age 71, and must do something with it, you have three options

1)       Take it as cash

2)      Convert it into a RRIF (Registered Retirement Income Fund)

3)      Convert it into an annuity

Let’s look at how each option works:

If you choose to cash out your RRSP, you could be in for a very large tax bill, depending on the amount in the plan.  Once funds are withdrawn from an RRSP, they become fully taxable.

Converting the funds to a RRIF (Registered Retirement Income Fund) allows you the most control and flexibility.  In a RRIF, you begin to take income from the plan each year, and the funds remain invested in the investment vehicle(s) of your choice (GIC’s, Segregated Funds, Mutual Funds, etc) .  While those withdrawn funds are taxable as income each year, they are coming to you in smaller amounts than withdrawing the entire plan up front, so the tax bill will not be so overwhelming.  Once funds have been converted into a RRIF, you must begin taking income from it the following year (or sooner if you wish).  There is a minimum amount that must be withdrawn annually, (determined by Revenue Canada), but you are able to take anything above the minimum out at any time, keeping in mind that all withdrawals are taxable as income.  A RRIF offers you the most flexibility, but the risk lies in the payments becoming too small in the future to maintain your lifestyle.

The final option is to convert the funds into an annuity.  Annuitizing the funds is a process whereby the funds in the RRSP are taken and converted into a stream of income for the rest of your life.  The downside of this strategy, is that if you pass away early in the plan, the funds are gone.  There are some plans that provide a feature whereby unused premium is returned to the beneficiary upon death.  Also, with an annuity, once you have decided to annuitize, you cannot change your mind later.  The major benefit of an annuity, is that you are guaranteed a specific amount of income for the rest of your life, no matter how long you live.

If you are accumulating funds in an RRSP, it’s a great idea to sit down with your advisor to get an idea of what kind of income stream those funds will provide you with in the future.  That way, you can determine if you are putting in an appropriate amount to live the retirement lifestyle of your dreams!


Brenda Hiscock CFP

Guilfoyle Financial