RRSP Maturity or Conversion Options

You have up until December 31st of the year that you turn 71 to "mature" your RRSP. Upon maturity, you have 4 options to choose from:

1. Do Nothing (or "forget to do something")

Senior_citizens_free.jpgThis is bad. If you don’t elect to convert your RRSP using one of the following three options, then the CRA deems you to have completely withdrawn all funds from your RRSP in the year you turn 71. This is bad because the entire value of your RRSP is now included as taxable income and you could be faced with a massive tax bill.

2. Convert to a RRIF

A RRIF is short for Registered Retirement Income Fund. It is very similar to an RRSP except you are no longer allowed to make contributions to it, only withdrawals. You can hold all the same investments as before – the only requirement is that you withdraw a minimum amount of funds every year (which are taxable as income). The CRA will let you know how much you have to take out as a minimum, but there is no maximum that you can withdraw with a regular RRIF. It is estimated that about three-quarters of all RRSP holders choose to convert their RRSPs to RRIF accounts at maturity.

3. Purchase a Life Annuity

This requires that you get a financial institution to exchange your lump sum value of your RRSP for a guaranteed stream of income payments for the rest of your life. You lose the ability to modify the amount and timing of income payments once you choose this option, but it does provide a guaranteed amount of income that will last as long as you do. This is certainly very appealing to more conservative investors.

4. Purchase a Term Certain Annuity to Age 90

This is different from a life annuity in that the term is "certain" (hence the name). If you lived to 94, this annuity’s income stream would have run out on you. If you only live to 86 though, your estate or beneficiaries may or may not be entitled to any funds depending on the options you chose when you signed up for this annuity. Make sure to go over all the choices until you understand them. A general rule of thumb: the more "features" or "options" you select, the lower the monthly income payments will be.

Keep in mind that you don’t have to commit all your funds to only one choice. Perhaps you like the features of a few of these different options for different goals. For example, it might make sense to purchase a life annuity with half your RRSP to guarantee a certain amount of income, and then use the other half of the RRSP to purchase a RRIF account so that you can access lump sums as necessary and control the investments in that half of your retirement savings.

Whatever you do, don’t just wait until the last minute to make up your mind! You could potentially be locking yourself into a decision for the next 30 years or more! Think it over, get some professional help and perhaps talk it over with your family too. 

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • Paul

    You should also mention that if you hold a RRIF at age 70, and you want to defer your payment until after you turn 71 (as per the new legislation), you do not have to retract the RIF back to a RSP.