You may convert your Retirement Savings Plan (RSP) to an income plan at any time, but must do so no later than the end of the year in which you turn 71.
RSPs were designed to provide retirement income, not a permanent tax shelter. Note that the “maturity” deadline is December 31 of your 71th year, not your actual birthday. Also, you can make contributions right up to that point.
There are four options in closing your RSP. Any or all of them can be combined.
Make a lump sum cash withdrawal or transfer out the securities intact. The full value will be taxed as income, which makes this option less attractive than those below.
Transfer the RSP assets to a retirement income fund (RIF). You maintain control over your savings and take income until the plan is exhausted. You must make at least one annual withdrawal, based on a schedule of minimums that rise as you age.
There is no withdrawal requirement in the first year that the RIF is set up — in other words if you set up you are RIF in the year that you turned 71 then you may delay your first withdrawal to the following calendar year. There is no maximum withdrawal limit, but you should carefully manage your plan so it does not run out too soon.
If you are withdrawing more than the minimum make sure that you do not bump yourself up into the next tax bracket.
To maximize the tax shelter, you can base your required withdrawals on the age of your spouse if he or she is younger.
Use the funds to buy a life annuity, providing regular income.
A single-life annuity guarantees income for as long as you live. A joint-annuity will run until you and your spouse both die. There is no estate value unless you arrange for a minimum number of payments and death occurs within that guaranteed period.
Use the funds to purchase a fixed-term annuity that provides regular income until age 90, and pays out a lump sum if death occurs before then.
Using your RSP contribution room after age 71
Many 71-year-olds have earned income from property rentals, director’s fees, business ownership interests, royalties and other sources. That creates RSP contribution room for the next year even though they can no longer have an RSP.
Here is how that room can be used:
If your spouse still has an RSP, you can make spousal contributions to his or her plan. You get the tax deduction.
Consider a last-minute overcontribution that equals the room you will get in the new year. Suppose you have $25,000 of earned income this year.
That would create $4,500 of RSP contribution room. Make a $4,500 overcontribution in December, just before closing your plan under the age-71 maturity rules.
You will face a one per cent overcontribution penalty for that month, costing $45. On January 1, the system will create $4,500 in new room and legitimize that overcontribution.
You will face no more penalties, and you will get a $4,500 tax deduction.
Remember to always consult your advisor before taking any action.
Written by Stuart Kirk, CIM. Stuart Kirk is an Investment Funds Advisor with Manulife Securities Investment Services Inc and a Retirement Planning Specialist with Hicks Financial Inc. The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Investment Services Inc or Hicks Financial Inc. For comments or questions Stuart can be reached at email@example.com or 250-954-0247.