Reaching Age 71 Triggers Many TAX Consequences for RRSP Owners
You are required by law to collapse and convert your RRSP on December 31 of the year that you turn 71.
This is the “RRSP Wall” that most people do not think about. Consequently, when you withdraw money from your RRSPs, the issuer of your RRSP will withhold your tax. You may end up paying more income tax than if you never contributed to an RRSP in the first place.
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RRSP Forced Conversion
The RRSP Conversion Impact on Your Financial Future
The Age 71 RRSP Challenge
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)
The Tax Problem
1) You may end up paying more income tax than if you never contributed to an RRSP in the first place.
2) The longer you need the income the less income you will receive.
3) You must by law withdraw a minimum percentage of your RRIF each year, whether you need the money or not.
Old Age Security (OAS) Clawaback per Dollar
RRIF Minimum Annual Withdrawal at Age 71
RRIF Minimum Annual Withdrawal up to Age 88
RRIF Minimum Annual Withdrawal up to Age 95
The percentage of RRSP contributors went down from 22.9% in 2015 to 22.5% in 2016.
This gradual downward trend can be observed over the previous 16 years.
SOURCE: Statistics Canada
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RRSP Wall Decision
You MUST make a decision when you hit the “RRSP Wall”
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.
Withdrawing Money from an ANNUITY is Taxable Income
If you 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 you transfer to an annuity is expected to earn interest rates that will fluctuate over time. However, you will NOT increase your income if interest rates are higher, thus you could be getting much less income than you should.
Withdrawing Money from a RRIF is Taxable Income
If you convert your RRSP money into a RRIF, you must by law withdraw a minimum percentage of your RRIF each year. The minimal withdrawal amount is 5.28% at age 71 that gradually increases year over year until it reaches 20% by age 95.
The minimal forced withdrawal may push you into a higher tax bracket, which means potential clawbacks of Old Age Security (OAS) 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.
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Avoid the “RRSP Wall” 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 – the sooner the better to Minimize your Tax Consequences.
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