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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, December 15, 2002
Successful navigation of the Registered Retirement
Saving Plan (RRSP) to the Registered Retirement
Income Plan (RRIF) transition takes some thought
for every case.
Those turning age 69 in 2002 must convert their RRSP
not later than December 31, 2002. The conversion choices
include cashing out the RRSP, a life annuity, a term
annuity to age 90, and a RRIF.
The RRIF option is popular because it provides the
highest level of flexibility.
On the other hand, investors younger than 69, who require
income from the RRSP, should consider leaving the RRSP
intact and making withdrawals as and when required.
Handling the RRSP/RRIF combination is truly a marathon,
not a 100-yard dash. Especially as the RRSP/RRIF vehicles
span the investor's lifetime and, perhaps, the spouse's
lifetime.
As an example, a couple age 60 could easily be planning
for the next 25 to 30 years. Similarly, a coupe age
50 could be planning for more than 35 years.
Therefore, the first question ought to be “What
is important about the RRSP/RRIF to you?”
Some say it is the preservation of the nest egg, some
emphasize growth of the portfolio, while others depend
on the income stream for a comfortable retirement. Yet,
for many it may be the major investment, or perhaps
the only form of pensionable asset available.
Decisions surrounding the RRSP/RRIF combination are
extremely important. Let's outline some considerations:
- RRSPs are savings vehicles, while RRIFs are income
withdrawal vehicles.
- No contributions are allowed to a RRIF.
- The eligible investments for a RRIF are the same
as the RRSP.
- Investment strategy need not change if it is appropriate
for the income withdrawals.
- All minimum RRIF withdrawals are governed by a
formula and are taxable as regular income.
- The first withdrawal commences in 2003.
- An election permits the formula RRIF payments according
to the age of the younger spouse.
- All RRSP deposits must be made before conversion
to a RRIF.
- Where applicable, the RRSP deposit can be made
to a younger spouse.
- Choose RRSP/RRIF beneficiaries as appropriate,
such as the spouse or children.
- If the planholder is over age 65 and does not have
an employer pension, the RRIF income qualifies for
the $1,000 pension income credit.
- RRIF withdrawals, in excess of the mandatory annual
minimum, can be made at any time.
- The three-year attribution rule still applies to
withdrawals, in excess of the minimum, from a RRIF
resulting from the conversion of a spousal RRSP.
- The primary advantage offered by the RRIF is the
marvellous flexibility. Each situation can be customized,
year after year.
Investors can choose the maximum level of income withdrawn,
the frequency of the withdrawals and the plan's investments.
On death, the RRIF can be rolled over to a spouse or
dealt through the estate. That is what makes RRIF’s
so flexible as a planning vehicle.
Clearly, navigating the transition from the RRSP to
the RRIF is an important element of maintaining financial
security. Paying special attention to the available
choices helps immensely.
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