Have a happy 69yh birthday- and then roll over RRSP

Have a happy 69th birthday - and then roll over RRSP

The ins and outs of turning savings into income

Richard Croft

Monday, September 11, 2006

Having written about the financial-services industry for more than 20 years, and having been a player in the industry for more than 30 years, I am still surprised about the issues that really concern investors.

Take, for example, the issue of holding foreign currency inside a registered retirement savings plan -- something I have received a large number of e-mails on, and something we talked about in a couple of columns over the past eight weeks.

It was an issue to which I, and probably most of the financial-services industry, had not paid much attention. Yet with recent changes removing the limits on foreign securities held within RRSPs, the idea of converting foreign currency back into Canadian dollars was not a legislated requirement. For investors this was a serious and costly matter, to the point that on Aug. 2, a class-action lawsuit was launched against Bank of Montreal. If nothing else, it has brought the issue to centre stage for the entire financial-services industry.

The same can be said for this week's question, from Mr. SW, on registered retirement income funds (RRIFs). Mr. SW is 69 years of age, and retired. He has two RRSP accounts, one at Bank "A" ($163,700) and the other at Bank "B" ($45,370). He maintains two RRSPs because in his words, he is "able to negotiate a higher rate of interest by playing one bank against the other." However, eventually he wants to consolidate his investments in order to simplify his portfolio and save time managing it.

Because of his age, he must roll the RRSPs into RRIFs this year. Both RRSP accounts contain long-term GICs. At present, Mr. SW has sufficient income and will only be withdrawing the minimum amount from the RRIFs next year.

Mr. SW wants to know is if he can wait until September, 2009 (when his long-term GICs mature), to consolidate his RRIFs into one RRIF. He also wants to know if it is possible to transfer a RRIF from one financial institution to another.

First, some background. A RRIF is governed by the Income Tax Act and is established with funds that are rolled over on a tax-deferred basis from an RRSP. At the age of 69, you are required under the Income Tax Act to collapse your RRSP and transfer the proceeds into a RRIF. Once the RRIF is established, you are required to withdraw a minimum amount each year and take the withdrawal into your taxable income. There is no stipulated maximum withdrawal.

There is also no limit as to the number of RRIFs you can have. As such, Mr. SW, you are able to maintain two RRIFs. The transfer of funds (i.e., your GICs) or property must be made directly from one plan (the RRSP) into the other (the RRIF), in order to maintain the tax-deferred status.

Your GICs can roll over into the RRIF(s), and you could continue to "play one bank against the other" as long as you like. However, you will have two RRIFs, and will be required to take the minimum withdrawal from each of them.

If you still want to consolidate your investments in September, 2009, you can execute a T-2033 "in kind" transfer from one RRIF to the established RRIF at the bank of your choice. By "in kind," we simply mean that you can transfer your GICs inside the RRIF, without having to cash out.

You could also choose to open a new self-directed RRIF at another financial institution and transfer the assets from both RRIFs "in kind" to the self-directed RRIF. One advantage with the self-directed option is that you are able to hold GICs and other securities (i.e., government bonds) that you feel might be appropriate.

You can choose to have the minimum withdrawal based on your age or on the age of your spouse or common-law partner (assuming you have one). If the spouse or common-law partner is younger, the minimum withdrawal will be less. In either case, the percentage of RRIF assets that must be paid out will increase annually.

If you elect to have the RRIF based on your spouse or common-law partner's age, you will still remain the annuitant of the RRIF. Any withdrawals are still attributed to your income. The advantage with this approach, assuming you do not need the income, is that the amount withdrawn from the RRIF is based on a formula tied to the younger spouse. That means you are able to leave more assets inside the tax shelter to compound on a tax-deferred basis.

The election to base the RRIF on the younger partner's age must be made when the RRIF is set up and before payments begin. Once the election has been made, you cannot change it. As a rule of thumb, it is always better to base the minimum withdrawal on the age of the younger spouse. Because there is no maximum withdrawal, if you need extra money in a given year, simply take it out. You cannot withdraw less, but you can always withdraw more.

If your spouse or common-law partner should die before you, the minimum amount continues to be governed by the age that your spouse or common-law partner would have achieved at the beginning of each year, as if he or she was still alive.

Richard Croft is president of Croft Financial and co-author of Protect your Nest Egg: Canadian Guide to Wealth Protection. He writes for the Financial Post on Mondays. Address questions to croftfin@aol.com.