Using Your Money Wisely During Retirement
It's important to understand the ins and outs of savings vehicles so you can make the best use of your funds in retirement. Flash Retirement also recommends the capsule entitled "Retirement Savings and Income Vehicles—Make an Informed Choice."
Are You Retired? Make the Most of Your ...
Individual Registered Retirement Savings Plans (RRSPs)
- You must convert your RRSP into retirement income by the end of the year you turn 71, failing which the total balance will be taxable. There is no minimum age for converting an RRSP into retirement income.
- RRSP conversion options:
- Purchase a life annuity or fixed-term annuity (annuity certain)
- Transfer the amounts in your RRSP to an RRIF
- Periodically withdraw amounts from your RRSP
- Be sure none of your investments mature after December 31 of the year you turn 71, unless your RRSP contract lets you transfer them to the income vehicle of your choice.
- You can withdraw funds from your RRSP at any time, but your withdrawal will be added to your taxable income and taxed immediately.
- The amount of taxes withheld at source is based on the amount withdrawn and the total tax rates (for Québec and Canada) listed below:
- 21% for withdrawals of less than $5000
- 26% for withdrawals of $5001 to $15 000
- 31% for withdrawals of more than $15 001
When You Die...
- The value of your RRSP on the day you die is generally added to your income for the year, and taxes on the RRSP will be based on the total income. The beneficiary will receive any tax-exempt amounts from your RRSP, but will be responsible for the tax bill.
- If your surviving spouse is the beneficiary, some or all of the RRSP's value on the date of death can be added to the spouse's income, at the decision of the liquidator or the liquidator's representative. The spouse can also transfer these funds to his or her own RRSP to postpone the tax bill. This solution is not possible if the RRSP is bequeathed to the spouse in the form of a trust fund.
- If the beneficiary is a child (or grandchild) who is dependent due to a physical or mental disability, the tax treatment is the same as if the beneficiary were the spouse. This is applicable even if the deceased left behind a surviving spouse.
- If the beneficiary is a dependent child (or grandchild) under the age of 18, the RRSP can be declared as the child's income. Taxes can then be deferred by purchasing a fixed-term annuity that comes to term no later than the child's 18th birthday. This tax treatment applies even if the deceased left behind a surviving spouse, but not if the RRSP is bequeathed to the child in the form of a trust fund.
Locked-in Registered Retirement Savings Plans (RRSPs)
- If you're subject to the Supplemental Pension Plans Act under Québec law, you'll be offered a locked-in retirement account (LIRA) instead. See the section below.
- Depending on the jurisdiction of your locked-in RRSP, to receive income you'll probably have to transfer some or all of the balance to an LIF or use it to purchase a life annuity from an insurer.
- You must convert your locked-in RRSP into retirement income no later than the end of the year you turn 71. There is generally no minimum age to convert it into retirement income.
- A locked-in RRSP is similar to a regular RRSP, with the following exceptions:
- You cannot contribute to it directly except by transferring funds from a supplemental pension plan.
- Restrictions apply to the amount you may withdraw from a locked-in RRSP. As a general rule, funds cannot be withdrawn before retirement, but this rule varies depending on the jurisdiction. Find out about the conditions that apply to your locked-in RRSP, especially if your balance is low or your life expectancy is short.
- Since May 2008, it has been possible to withdraw funds from a locked-in RRSP under federal jurisdiction. Contact your financial advisor or your financial institution for details.
- All RRSP-eligible investments are also eligible for locked-in RRSPs.
When You Die
- The balance of your locked-in RRSP is paid out to your spouse or heirs.
- Different payment terms may apply. In some jurisdictions the balance must remain locked in.
- The amounts paid are taxable, unless exempt under tax rules. See the section on RRSPs - When You Die.
Locked-in Retirement Accounts (LIRAs)
- LIRAs are only used to save for retirement. To draw an income, you'll have to transfer the capital to an LIF or use it to purchase a life annuity from an insurer.
- You can transfer your LIRA to an LIF at any time or age in order to draw a pension. The transfer may be delayed, however, if your investments haven't yet matured when you ask for the transfer.
- You must transfer your LIRA to an LIF or convert it into a life annuity by the end of the year you turn 71, regardless of when your investments mature.
- All RRSP-eligible investments can also be used for an LIRA.
When You Die...
- The savings in your LIRA are no longer locked in. The LIRA becomes equivalent to an individual RRSP, and the balance is paid out to your spouse if you have one. Otherwise, it's paid out to your designated beneficiary or heirs.
- The amounts paid are taxable, unless exempt under tax rules. See the section on RRSPs - When You Die.
Registered Retirement Income Funds (RRIFs)
- With an RRIF, you can receive a periodic income during retirement.
- RRIFs are RRSP extensions (as registered tax shelters and investments that continue to grow) that let you progressively withdraw your registered savings.
- You must make a minimum annual withdrawal from your RRIF. The amount depends on your age, your spouse's age, and the balance. In the calendar year after you open your RRIF, your total withdrawals must be at least equal to this amount.
- You can withdraw more than the minimum from an RRIF at any time, depending on how long you want the funds to last.
- When you die, the remaining funds are taxable, unless exempt under tax rules. See the section on RRSPs - When You Die.
Life Income Funds (LIFs)—If you're subject to Québec law
- Québec LIFs are governed by the Supplemental Pension Plans Act.
- At the beginning of each year, your financial institution calculates the minimum and maximum amounts you may withdraw during the year.
- The minimum amount is the same as the minimum withdrawal for an RRIF. See the section on RRIFs.
- The maximum is based on your age, your LIF balance, and the annual LIF base rate. Unlike for the minimum, your spouse's age is not taken into consideration.
- You'll receive the amount you wish to withdraw according to the number of payments set out in the contract with your financial institution. Withdrawals are taxable.
- There is no minimum age to begin drawing an LIF income.
- If you're under 65, you may draw an additional income from your LIF, called a "temporary income," if so stipulated in your contract. You have to apply to your financial institution each year, and there's an annual ceiling on temporary income amounts—$22 960 in 2019. Withdrawals are taxable.
- If you're under 54
You may apply for a temporary income each year, but only if you have no more than one LIF and your expected annual income in the next 12 months does not exceed a set limit—$22 960 in 2019.
- If you're between 54 and 64
You may apply for a temporary income each year, regardless of your income. The purpose is to provide people under 65 with an additional income from their LIFs. When you apply for a temporary income, your financial institution will adjust your life income downward.
- If you're 65 or over
You may draw a life income from your LIF, but you're no longer eligible for a temporary income. This age limit was set because you can begin receiving a retirement pension under the Québec Pension Plan at age 65, and, depending on your date of birth, an Old Age Security Pension.
- You can transfer your LIF to another LIF mid-year (for instance, if you change financial institutions). The transfer may be delayed if your investments have not yet matured when you apply.
- Make sure you withdraw as much as you need for the rest of the year before making the transfer, since you cannot draw income from your second LIF until the beginning of the next year.
- If you no longer want to draw an income from your LIF, you can transfer the balance to an LIRA at any time up to the end of the year you turn 71. The transfer may be delayed if your investments have not yet matured when you apply.
- Depending on your contract, some LIF withdrawals (over the minimum) may be transferable directly to an RRIF or RRSP (if you're under 71).
When You Die...
- Your LIF balance is no longer locked in. The LIF becomes similar to an individual RRSP and is paid out to your spouse if you have one. Otherwise, it's paid out to your designated beneficiary or heirs.
- The amounts paid out are taxable, unless exempt under tax rules. See the section on RRSPs - When You Die.
Life Income Funds (LIFs)—If you're subject to federal law
Federal LIFs are governed by Canada's Pension Benefits Standards Act of 1985.
The main differences from an LIF under Québec law are the following:
- The temporary income option is not available.
- When you die, the balance of your LIF remains locked in. It must be transferred to a locked-in savings or income vehicle in the name of your spouse, other designated beneficiary, or heirs.
- Since May 2008, the rules for withdrawing funds from LIFs under federal jurisdiction are more flexible:
- If you are 55 or over, you can make a one-time withdrawal or transfer to an RRSP of up to 50% of the balance of your LIF.
- You can unlock funds at any age if you are facing financial hardship or have less than the minimum amount of funds locked in for retirement ($28 700 in 2019).
Life Income Funds (LIFs)—If you're subject to a law other than Québec or federal law
Different features and restrictions may apply. Ask your financial advisor or institution.
Purchasing an Annuity from an Insurer or Financial Institution
- When you purchase an annuity, your pension varies depending on your sex, your age, the features of the annuity (e.g., guarantee period, indexing, etc.), the interest rates in effect at the time of purchase, and administration fees. Your annual retirement income will be lower, for example, if you purchase the annuity when interest rates are low.
- If there's no guarantee period on the annuity, you run the risk of forfeiting capital if you die early in your retirement, since there is no amount payable when you die. If the annuity does have a guarantee period, your payments will be lower than if it had a shorter guarantee or none at all. Annuity payments are taxable.
- Life annuities and fixed-term annuities (annuities certain) are available from insurance companies. Fixed-term annuities are also available from financial institutions.
- Life annuities provide a guaranteed source of income as long as you live.
- If purchased from savings in an SPP, locked-in RRSP, LIRA, or LIF, there may be some restrictions on the features of the annuity.
Fixed-Term Annuities (annuities certain)
- Fixed term annuities provide a preset number of payments.
- The number of payments is set out in the contract. The term directly affects the amount of each payment.
- If the funds come from an RRSP that is not locked-in, a fixed-term annuity must be purchased. You will receive 90 payments, minus your age in whole years when you begin receiving your pension. If you die before you turn 90, your beneficiary will receive the remaining payments. You can also elect to base the number of payments on your spouse's age, if younger.
- If the annuity is purchased from a deferred profit-sharing plan (DPSP), the maximum payment period is 10 years.
- An annuity certain cannot be purchased from an SPP, locked-in RRSP, LIRA, or LIF.
- The advantage is that the fixed guarantee period makes your monthly payments higher than they would be under a life annuity.
- The disadvantage is that payments stop when your contract comes to term, even if you're still alive.
Worth knowing about...
RRIFs vs. Annuities
- RRIFs give you better control over the way your money is invested and are more flexible in terms of withdrawals. But they also require more work on your part. If you purchase an annuity, you won't have any more investment decisions or worries about returns.
- You can convert your RRIF balance into a life annuity or fixed-term annuity (annuity certain) at any time. The reverse does not hold true. Once you've purchased an annuity, you have to keep it—the decision is irreversible.
- The main disadvantage of RRIFs is that they can run out before you die, which is not possible with a life annuity. When you manage your RRIF, try to strike a balance between return on investment and withdrawals.
- With either an RRIF or annuity, you're eligible for a federal tax credit for pension income when you turn 65 (with an SPP, you're eligible at any age). An annuity, like any fixed-income product, offers less protection against inflation.
- If you're subject to Québec law and are 65 or over, you may withdraw some or all of your LIRA or LIF as long as the total balance of your retirement savings vehicles (LIRAs, LIFs, locked-in RRSPs, defined contribution pension plans, or the defined contribution component of your SPPs) does not exceed 40% of the maximum pensionable earnings under the Québec Pension Plan in the year you apply. In 2019, the maximum is $22 960.
- The financial institution that administers your LIRA, LIF, or locked-in RRSP, or the administrator of your SPP, must keep you informed of your balance. To cash in your LIRA or LIF, contact your financial institution. Funds received are taxable unless you transfer them to an RRSP (as long as none of the restrictions mentioned above apply).
- RRSP and RRIF savings are insured by either the Autorité des marchés financiers or the Canadian Deposit Insurance Corporation (CDIC), depending on whether the financial institution is provincially or federally chartered. Coverage is $100,000 per person, per institution.
- When you choose a savings or income vehicle, ask about any fees and make sure the company is stable and offers first-rate services.
- Never choose a savings or income vehicle without considering your needs and financial situation. Your choice should be based on your age, financial objectives, total savings, and financial needs.
- For more on savings and income vehicles, Flash Retirement recommends visiting Retraite Québec Web site at www.retraitequebec.gouv.qc.ca and the Canada Revenue Agency Web site at www.cra.gc.ca. You may also contact your advisor or financial institution.
Tax-Free Savings Accounts (TFSAs)
- From 2009 to 2012, the TFSA contribution limit was $5000 a year. For 2013 to 2014, the limit was set at $5500. For 2015, it was $10 000. Since 2016, the contribution limit was decreased to $5500. This savings vehicle is a useful and flexible tool that can help you meet your retirement savings needs. Its main characteristics are as follows:
- Contributions are not tax deductible.
- Capital gains and other investment income generated by the TFSA are not taxable.
- Unused contribution room is carried forward to the following years.
- Withdrawals from a TFSA are not taxable, and the total amount of the withdrawals is added to the contribution room for future years.
- You can contribute to your spouse's TFSA.
- There are no restrictions on withdrawals from a TFSA, and there is no disbursement requirement at age 71.
- For more information on TFSAs, contact your financial advisor or financial institution.