Your RRSP Account Must be Collapsed and Converted with TAX Consequences

 

Reaching Age 71 Triggers Many TAX Consequences for RRSP Owners

The last day that you can contribute to your RRSPs is December 31 of the year that you turn 71 years old. Therefore, you are required by law to collapse and convert your RRSP. This is the “RRSP Wall” that most people do not think about.

The problem with the RRSP Wall is that by law you are mandated to make a decision with regard to your RRSPs. Consequently, when you withdraw money from your RRSPs, the issuer of your RRSP will withhold your tax. So what can you do?

You can consider typical financial advice with the following options but you MUST make a decision when you hit your RRSP Wall:

  1. You can Withdraw your RRSPs in cash (taxable income)
  2. You can Purchase an annuity with your RRSPs to slowly withdraw money (taxable income)
  3. You can Transfer your RRSPs to a Registered Retirement Income Fund (RRIF) to slowly withdraw money (taxable income)

 

1. Withdrawing CASH from a RRSP is Taxable Income

Depending on your tax bracket, when you cash-out your RRSPs you may end up paying more income tax than if you never contributed to an RRSP in the first place. Although the rate of taxation is dependent on what other income you may have, converting your RRSP to cash is NOT the recommended route to take.

 

2. Withdrawing Money from an ANNUITY is Taxable Income

If you decide to pay a life insurance company a lump sum from your RRSPs, in exchange for guaranteed income for life, you will pay tax on that income. You also have to consider the fact that the longer you need the income the less income you will receive.

Any money that you decide to transfer to an annuity is expected to earn interest rates, which will fluctuate over time. Although low interest rates will NOT negatively affect your income, you will NOT increase your income if interest rates are very high, therefore you could be getting much less income than you should.

 

3. Withdrawing Money from a RRIF is Taxable Income

If you decide to convert your RRSP money into a Registered Retirement Income Fund your money can continue to grow, however, you must by law withdraw a minimum percentage of your RRIF each year, whether you need the money or not. The minimal withdrawal amount is 5.28% at age 71, which gradually increases year over year until it reaches 10.21% at age 88 and up to 20% by age 95.

The minimal forced withdrawal does not seem like a lot of money, however, it may be enough to push you into a higher tax bracket;  that means potential clawbacks of Old Age Security (OAS) pension entitlement or even the elimination of the “age credit” (tax credit). The clawback of your government benefits may have a significant impact on your retirement income.

Alternative Solution: You Can Get Your Money Out of Your RRSPs and Minimize Taxes

Avoid the RRSP Wall altogether by making important changes NOW. Don’t waste any more time!

You can speak with a Gold Standard Group associate today to explore much better options for your RRSPs before you are 71 years old to Minimize your Tax Consequences. The sooner you act the better you will be when it comes to RRSPs and your retirement income.

If you decide to follow typical financial advice, did you know that the balance of your retirement payments at early death is fully taxable in the estate? Many unforeseen issues like this can be mitigated with proper planning for your retirement. Gold Standard Group associates can show you ways to minimize taxes and maximize your income for life.

Get your FREE consultation today and find out what can be done for you!

Gold Standard Group and its associates specialize in setting up insurance-based tax-shelter accounts to help you get More after-tax Money in Your Pocket, create wealth for you, your family, your business, and future generations.

 

References:

  1. Government of Canada (Options for your own RRSPs):
  2. Government of Canada (Minimum withdrawal factors for registered retirement income funds):
  3. Government of Canada (Old Age Security pension recovery tax):
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