If you are going to turn 71 this year, you have some important decisions to make with your RRSP’s.
Your RRSP must be collapsed by December 31st of the year you turn age 71. There are three options available for your RRSP’s:
Note: The law changed in 2007 the age at which you must convert your RRSP from 69 to 71.
- Cash out the entire RRSP and include the entire amount withdrawn in income that may not be the best alternative if the amount of accumulated income in the RRSP is significant.
- You can purchase a fixed term annuity or life annuity to provide for a stead stream of income over your life or your spouse depending on the plan.
- Use the funds in the RRSP to establish a Registered Retirement Income Fund or RRIF.
The RRIF allows you to spread the income you have accumulated in your RRSP between the time you established the RRIF and your death. A RRIF can be established at any time but there is a required minimum annual withdrawal that must be made from the RRIF. The amounts are based on formulas set by regulations. The amount of annual minimum withdrawal is a percentage of the assets in the RRIF and increases annually.
Amounts withdrawn from a RRIF are included in income when withdrawn and the advantage of the RRIF is that you have the flexibility to structure your income stream as you see fit.
If you have turned 71 this year and will have earned income, consider making an over contribution in December (or immediately before you convert to a RRIF). You will be required to pay the 1% penalty tax on the over contribution for only one month.
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Withholding tax is applied at source as an estimate to the tax liability to you as a result of RRIF income received. Any tax discrepancy will be determined when you file your personal tax return. At your discretion you may request that the payer increase withholding tax in order to reduce or eliminate a future tax liability.
There is no withdrawal necessary in the year a RRIF (Registered Retirement Income Fund) is set up, but there are minimum amounts that must be withdrawn annually starting in the year after setup. Unless certain types of annuities are held in the RRIF, the minimum withdrawal amount is calculated by multiplying the market value of the RRIF holdings at the beginning of the year by a “prescribed factor”.
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