RRSP Termination Options

Termination of an RRSP can be done in four ways:

  1. Funds can be withdrawn. At the time of withdrawal, the entire amount becomes taxable as ordinary income. Capital gains and dividends that would have been taxed at a preferentially low rates outside the plan become taxable at full income rates once dispensed from the plan.
  2. Funds can be used to purchase an annuity. None of the RRSP proceeds are taxed at the time of purchase but only as paid out by the annuity. There are many kinds of annuities. The highest rate of pay is for the simple life annuity. The life annuity stops when the annuitant dies. A joint and last survivor annuity can pay benefits until the second of two persons, usually spouses, dies. Annuities may also have guaranteed periods of payment so that the death of a person or of spouses still leaves a defined stream of income for heirs or others. Annuities may be set to decline once OAS payments begin, thus preserving them from the clawback, and may be indexed. The advantage of an annuity is that, once established, it takes no administrative efforts to run it, and market downturns will not affect payouts.
  3. An RRSP can be converted to a RRIF (Registered Retirement Income Fund). A RRIF is really an addition to an RRSP that makes the plan operate as a payout mechanism. RRSPs can be RRIF’d at any age but must be RRIF’d by December 31 in the year the owner turns 71. At that point and for the rest of the owner’s life, there is a minimum annual payout.
  4. A locked in retirement account (LIRA) — often a sum of money held in an account following retirement or apportionment of assets in a divorce — can be converted to a Life Income Fund (LIF) or, in certain cases, to a Life Retirement Income Fund (LRIF). A LIRA must be converted to a LIF or LRIF by December 31 the year the owner turns 71. However, in many provinces, LIF withdrawals can begin at any age as long as the income is used for retirement income. Prior to that, the funds remain locked. LIFs and LRIFs have annual minimum and maximum withdrawal limits that increase as you get older.