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RRIFs; Annuities: What to do when your RRSP Matures

You’ve done everything right. You’ve diligently contributed to your RRSP over the years. Tax-free growth and compound interest have both served you well, and your investments have grown significantly since you started. But as they say: all good things come to an end.

What do you do when your RRSP matures? Whether you’re approaching this deadline or you simply want to know your options before getting started, this post is for you.

When does my RRSP mature?

Regardless of when you set up an RRSP, the account must close no later than December 31 of the year you turn 71. Don’t worry—you won’t lose any of your investments at this point—they just can’t be contained in an RRSP structure anymore. At this point, you’ll have to decide on your next move.

What are my options when I turn 71?

When your RRSP approaches maturity, you’ll have to decide between three basic options:

  1. Transfer your RRSP funds into a Registered Retirement Income Fund (RRIF)
  2. Transfer your RRSP funds into a registered annuity
  3. Take out your RRSP funds as cold, hard cash

Before you rush toward option #3 and go on a spending binge, let me go over the benefits and drawbacks of each. Your choice will ultimately depend on tax considerations and the level of risk you are comfortable with.

Option #1: Registered Retirement Income Fund (RRIF)

The first option is to transfer your RRSP funds into a RRIF. In doing this, you would continue to shelter your investments from tax, including any income they generate. However, as with RRSPs, you pay tax on any money withdrawn from your RRIF.

That’s not to say RRIFs are the same thing as RRSPs. After rolling your RRSP investments into the RRIF, you can’t make any additional contributions. RRIFs also have a forced annual withdrawal, meaning you must withdraw a certain amount from the fund each year.

RRIFs are great because you have the opportunity to earn greater returns on your investments, but there is an added level of risk. Remember: In retirement you don’t have a regular source of income to fall back on if your investments have an unexpected loss.

Option #2: Registered Annuity

The next option is to transfer your RRSP funds into a registered annuity. This is a contract with a life insurance company. You deposit a lump sum of money and they agree to pay you a guaranteed income in regular payments for the rest of your life.

Annuities are a great option if you want a guaranteed source of income in retirement. Just keep in mind that once you buy an annuity, you won’t have access to your savings, and you can’t make any changes to it. Your regular payment amounts are locked in, and you can’t change them for any reason.

Option #3: Cash

Finally, you can also take out your RRSP funds as cash. This is definitely a tempting option (and you’ve earned it, right?). Keep in mind that if you go this route, all of your withdrawals will be taxable as regular income. If you have a lot of savings to withdraw, this could push you into a higher tax bracket, increasing the amount of income tax you will have to pay.

Of course, you don’t have to spend it all right away if you take it as cash. There are great options with high-interest savings accounts and other investments, all of which you can explore using our savings tools.

Bonus Option: Consider a mix

Of course, you don’t have to choose just one of these options. For many people, using both RRIFs and annuities provides the perfect level of investment growth and safety.

If you were confused about your post-RRSP savings options, I hope this article helped you make the right choice. Now put this knowledge to work and enjoy that retirement!

What is your plan when your RRSP matures? If it’s already matured, what path did you take? Let me know in the comments section below or tweet us @RateHub!

Flickr: NOAA