Income Options
Generally , when we take money out of our RRSPs , we have three main options :
● Cash it out . Money can be taken out of your RRSP in a lump sum payment at any time . When you do this , it gets added to your income for the year . A large sum could quickly put you into a high tax bracket in that year of withdrawal . You ’ ll pay an upfront withholding tax at the time of withdrawal — 10 % for $ 5,000 or less ; 20 % for $ 5,001 to $ 15,000 ; 30 % for over $ 15,000 . This isn ’ t a strong option for most people unless they need cash immediately .
● Convert your RRSP to a RRIF . With a RRIF , you continue to invest your funds , like you did with your RRSP . You only pay tax on the amounts you withdraw — the rest continues to grow tax-sheltered . You ’ ll have regular payments — for most people , this will be the RRIF minimum set by the government . At age 71 , the minimum withdrawal is 5.28 % of the RRIF balance , but if you need to take extra funds out at any time , you can — you control these . The minimum withdrawal percentage increases each year . For RRIF payments , you ’ ll have the option of deciding how often you ’ d like to take your money out — yearly , quarterly , or monthly . Some prefer to get one lump sum per year . Check with a professional adviser on specifics for your individual situation .
● Use an annuity . An annuity places a lump sum of money with a financial institution , and in exchange , you receive a guaranteed monthly amount for the rest of your life . Annuities can be a good choice for anyone for whom RRSPs are the primary income source or who may have a defined contribution pension from their employer that will pay out as a lump sum . There are many options with annuities so talk to a professional financial planner for the annuity that works best for your situation .
Some people find that when these withdrawals start , they don ’ t need the funds for their daily budgets . If you haven ’ t yet maxed out your Tax-Free Savings Account , Harcourt suggests this is a great place to put those funds until you need them . The funds will be invested , continue to grow , and you can take them out tax-free whenever you need them . The TFSA also has no upper age limit so you can keep it for life if you wish .
Which way makes sense for you ? It will depend on your priorities : certainty versus control , guaranteed monthly payments versus something in the bank . As a family , it also depends on your other sources — for example , whether you ’ re accessing two pensions or one .
For those looking for harmony in their financial decision making , talk to a professional financial planner to help walk you through your options . This is never a decision you need to make on your own .
Sheila MacKay retired over ten years ago and is now looking forward to discussing new ideas with her financial planner . news & views SPRING 2023 | 47