Withdrawing money from your RRSPs in retirement
If you turn 71 this year, you will have to convert any of your registered plans into an income vehicle by December 31. When it comes time to convert your RRSPs you have one of four options:
- Cash out the RRSP. Unless you have a fairly small RRSP, this option may be very costly because your entire RRSP will become taxable in the year of withdrawal.
- Life Annuity. A life annuity is really another word for a pension. In the conversion to a life annuity, you simply give your money to a life insurance company. In turn, they pay you a fixed stream of income that is guaranteed for the rest of your life. Once you pass away, your income stops. There are many variations of annuities (joint, guarantee periods, reduction factors, indexing).
- Term Annuity to age 90. The Term Annuity to age 90 is the same as a life annuity. However, regardless of your life expectancy, the annuity is paid until you reach age 90. If you pass away before age 90, you can designate a beneficiary to continue to receive the payments.
- RRIF. The RRIF is by far the most popular income option for RRSPs. It is flexible in many aspects. You can select the investments, income frequency, and amount of income. You can also make changes to all of these aspects in the future.
Which option is best for you?
To make the right decision, you will need to run some projections so you can compare the income levels from the different income options.
If you are looking for guaranteed lifetime income the life annuity is likely to be your best bet. The major problem with annuities today is interest rates are so low. When you buy and annuity, you are really locking into current interest rates for the rest of your life. When it comes to buying an annuity, you should shop annuities with different insurance companies because annuity rates can vary drastically from one carrier to another. Once an annuity is set up, it is set up for life. There are no provisions for flexibility and change. You must also be aware of the survivorship issues if you are considering life annuities.
If you are looking for more flexibility, RRIF is by fare the more popular choice. With a RRIF, you have flexibility over income, investments, frequency, etc. You also have the flexibility and control to move from a RRIF to an annuity in the future. You might elect to use a RRIF until interest rates go up at which time to can lock into higher rates with a Life Annuity.