By Adrian Mastracci
Canadian Treasurer Magazine
February/March 2004 Issue

Canadians who turn 69 in calendar 2004 must convert their Registered Retirement Savings Plans (RRSP) to a Registered Retirement Income Fund (RRIF) or an annuity by December 31. But the path from RRSP to RRIF requires some planning, and the planning must accommodate most of a person’s lifetime.

As an example, consider a couple around age 60. They could easily be planning for the next 25 to 30 years. Similarly, a couple around age 50 could be planning for more than 35 years. That's one big reason why it's important to be aware of the rules and options governing the RRSP conversion.

The RRSP and the RRIF can provide considerable impact on the finances. By deferring taxes, they enable individuals to accumulate significant pools of capital over time. So you have to ask what is important about the RRSP/RRIF. Then you can start mapping out the transition path that makes sense.

Many investors focus on preserving the nestegg. Some emphasize portfolio growth. Others concentrate on the retirement income stream. Meanwhile, your RRSP/RRIF may provide the major source of income for your old age.

Ongoing decisions about the RRSP/RRIF combination are very important. Here are some points for consideration:

• As the names imply, RRSP’s are primarily savings vehicles, whereas RRIF’s are income withdrawal vehicles.
• No contributions are allowed to be made into a RRIF.
• RRSP planholders who turn age 69 during calendar 2004 must convert their RRSP not later than December 31, 2004.
• Younger planholders, who may require income from the RRSP, are likely better off leaving the RRSP intact until age 69. Withdrawals can be made as and when required until then.
• The choices available at time of conversion include cashing out the RRSP, a life annuity, a term annuity to age 90, and a RRIF.
• The RRIF has risen to be the most popular because it delivers considerable flexibility.
• The eligible investments for the RRIF are the same as the RRSP. Hence, investment strategy need not change if it's appropriate for the income withdrawals. Existing RRSP investments can be transferred directly to the RRIF.
• All minimum RRIF withdrawals are governed by a formula (see Table 1, below) and are fully taxable as regular income.
• The first RRIF withdrawal commences in 2005 for those who convert the RRSP in 2004. The RRIF grows to its maximum if the recipient elects to receive the withdrawals at the end of each year.
• If the spouse is younger, a couple may elect to receive the minimum RRIF payments based on the age of the younger spouse.
• All RRSP deposits must be made to the account before conversion to a RRIF.
• If applicable, the RRSP deposit can be made to the younger spouse.
• If there is no spouse, the planholder may consider making the 2005 RRSP contribution before converting the RRSP in 2004. A penalty would apply and the RRSP deduction is claimed in the tax return filing for 2005.
• A beneficiary should be designated for each RRSP/RRIF plan as appropriate for the individual situation, such as the spouse and children.
• If the planholder is over age 65 and does not receive an employer pension, the RRIF income qualifies for the $1,000 pension income credit.
• Voluntary RRIF withdrawals, in excess of the mandatory annual minimum, can be made at any time.
• If a RRIF resulted from the conversion of a spousal RRSP, the three-year attribution rule still applies to withdrawals in excess of the minimum.
• A planholder may have more than one RRSP and RRIF.

The primary advantage offered by a RRIF is flexibility. Each situation can be customized, year after year. Investors can choose the maximum level of annual income withdrawn, the frequency of the withdrawals and the plan's investments.

Upon the death of the planholder, the RRSP/RRIF accounts can be passed on to the surviving spouse and ultimately to other beneficiaries named in the will. Hence, the value can accrue to family members and be dealt with as part of the estate.

Table 1: Bit by bit
The following table shows minimum RRIF withdrawals for new accounts:

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.