October 1997

If Age 69, 70, or 71, Must
Convert RRSP by Dec. 31

© Talbot Stevens

One of the other attacks on RRSPs in the 1996 federal budget, aside from the introduction of the Seniors Benefit, is that RRSPs are no longer allowed to grow tax-deferred until age 71. They must now be collapsed by the end of the year that you turn 69.

This potentially hurts RRSP savers in two ways. Those who have earned income at this age, or unused RRSP contribution room, have lost two years of RRSP contributions.

More importantly, everyone loses two years of tax-deferred growth of their RRSP.

1997 is the transition year, where anyone who is either age 69, 70, or 71 must collapse their RRSPs by December 31.

This means that this year, approximately three times as many seniors will have to make a major, once-in-a-lifetime decision on what to do with their RRSPs.

A recent Scotiabank/Angus Reid study revealed that 30% of RRSP investors aged 50 to 70 — about 400,000 Canadians, were not aware of the change.

If you know of anyone aged 69 through 71 with RRSPs, don't forget to “Help a Friend” and make sure they are aware that they must convert their RRSPs by the end of the year.

If they don't, they will have unknowingly made the worst of the three possible RRSP termination options: cashing out the entire RRSP in a lump sum.

This is generally the worst option because the entire RRSP value will be added on top of your income, perhaps losing more than half of it to Revenue Canada.

The other two basic RRSP termination options are to purchase an annuity or to convert to a RRIF (Registered Retirement Income Fund). Any combination of these is also possible.

The second option is to purchase one or more annuities. Buying an annuity is essentially exchanging a lump sum of money for ongoing monthly income for a fixed number of years, or for the rest of your life.

Some of the advantages of annuities are that they provide a guaranteed income for life, if you choose, and once you've made the decision, require no investment effort or expertise. Disadvantages include total loss of flexibility and control over your investments, no opportunity to invest for growth, and generally little, if any, money is left over for the estate. Annuities are less popular these days because they are based on interest rates that are well below average historical levels.

Generally, the best RRSP termination option is to simply convert it into a RRIF. This is essentially a continuation of an RRSP with all of the same flexibility and investment options. RRIFs also allow all money left over when you die to be passed to the estate, after paying taxes.

Before you make this once-in-a-lifetime decision on how to terminate your RRSP, make sure you see your trusted advisor to fully understand the options that are best for your specific situation.

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