What it means
An RRSP is a tax-sheltered account in which Canadians save for retirement. Contributions are deductible against income, investments grow without annual tax, and tax is paid only when money is taken out.
The government does not let the shelter last forever. The plan must be closed, or matured, by the end of the year in which the holder reaches an age limit set in the tax legislation, so the holder has to decide what to do with the money by then.
The main options are to move the funds into a registered retirement income fund, or RRIF, buy an annuity that pays a regular income, or cash out the plan and pay tax on the whole amount. A mixture of these is possible.
A RRIF keeps the money invested but requires the holder to withdraw a minimum amount each year. The minimum is a percentage of the balance, and the percentage factors are set out in tax rules and generally increase with age, so withdrawals rise as time goes on.
Every withdrawal counts as taxable income, which affects the holder's tax bracket and may influence income-tested benefits. Because rules and limits can change, anyone approaching maturity should check the current requirements with the tax authority or a qualified adviser and plan the timing of withdrawals.
Finance teams and advisers often model the decision to see how long the money will last. The key inputs are the balance, the investment return, the withdrawal pattern and the expected tax rate.
In practice
Real-world examples.
Example
A retired teacher approaching the age limit moves her $350,000 RRSP into a RRIF. She withdraws the minimum each year, which gives her about $17,500 in the first year at an illustrative 5% factor.
Example
A self-employed consultant uses part of his matured RRSP to buy an annuity that pays a fixed monthly amount for life. He keeps the rest in a RRIF so that he can take more when he needs to. The annuity gives him certainty, and the RRIF gives him flexibility.
Example
A widow inherits her husband's RRSP and discusses with an adviser how to roll it over without an immediate tax bill, considering the rules about who the beneficiary is.
Formula
Calculation
Minimum annual RRIF withdrawal = Account balance at the start of the year x Prescribed withdrawal factor
The prescribed factor is set by tax rules and rises with age. Suppose the factor for the holder's age is 5.0% and the balance on 1 January is $400,000.
Minimum withdrawal = $400,000 x 5.0% = $20,000. If the investments earn 6% during the year, the balance after the withdrawal grows to roughly ($400,000 - $20,000) x 1.06 = $402,800, ignoring timing details, so the holder can take the minimum without eroding the capital that year.Case study
Seen in the real world.
Maplewood Wealth is an illustrative, fictional advisory firm whose client, a retired engineer, had $600,000 in an RRSP and was only a few months away from the year in which it had to be closed. He assumed he would have to cash it all out and was alarmed at the potential tax bill.
The adviser explained the alternatives. By moving the money into a RRIF, he could stay invested, draw only the required minimum each year and spread the tax over many years, while keeping some of the plan in cash for emergencies.
They modelled withdrawals at several rates and tax levels, and showed that spreading payments cost far less in tax than cashing out in a single year. In this illustrative story the engineer chose the RRIF and a small annuity, and understood that the minimum is a floor and not a recommendation.
Watch out
Common mistakes.
- Cashing out the whole RRSP at maturity, which adds the full balance to that year's taxable income and may push the holder into a much higher tax bracket.
- Missing the deadline for maturing the plan, which can trigger unwanted tax consequences.
- Assuming the minimum withdrawal is enough to live on, when it may be too low or too high for the holder's needs and should be compared with a proper retirement budget.
Questions
People also ask.
What does it mean for an RRSP to mature?
It means the plan is closed and its contents converted into retirement income, usually a RRIF or an annuity, by a deadline in the tax rules.
Can I withdraw more than the minimum from a RRIF?
Yes, but extra withdrawals are taxable and some may be subject to withholding tax at source.
Is a matured RRSP the same as a RRIF?
No, a RRIF is one of the products into which a matured RRSP can be moved, alongside annuities and cash.
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