RRSP-to-RRIF conversion deadline needn t be so scary, experts advise
|CTVnews 17 Feb 2019 at 07:02|
CALGARY -- For Canadians who ve made faithful contributions to an RRSP for most of their working lives, converting it to an RRIF may seem a terrifying milestone.
Overnight, your nest egg that has steadily grown for decades becomes a declining asset, with a government-mandated, taxable annual minimum withdrawal to ensure its gradual depletion.
Retired investors might decide they need to make big changes to the investment mix in their registered retirement savings plan (RRSP) to brace for the feared impact of its conversion to a registered retirement income fund (RRIF).
At that time, it s best to take a deep breath, talk to a trusted financial adviser, and realize that no change at all is often better than too much, says James McCreath, portfolio manager for BMO Nesbitt Burns in Calgary.
"One of the biggest mistakes people can make is getting too concerned with recalibrating things just because it s a change on the title of the account or the structure of the account," said McCreath, pointing out there s no legal requirement to change any of the investments in an RRSP when it becomes an RRIF.
"The RRSP-RRIF conversion is a small portion of the overall planning for retirement. It s a tax issue that the government has," agreed David Popowich, portfolio manager with Popowich Karmali Advisory Group CIBC Wood Gundy in Calgary.
"It has very little to do with the success of an overall retirement plan. People get confused about that all the time."
An RRSP can be converted to a RRIF at any time, but must be turned into a RRIF, annuity or paid out in a lump sum by the end of the calendar year in which the investor turns 71.
Aside from the fact that one is designed to allow tax-sheltered growth and the other to allow the government to start to receive long-delayed tax payments, RRSPs and RRIFs are similar creatures.
Both can contain many types of investments. The investor has the right at any time to redistribute assets within the account. You can have more than one RRSP or RRIF account at the same time. You can withdraw from either, but the funds are taxable except in certain circumstances.
Although no new money can be added to the RRIF once it s established, you can decide which investments in the RRIF are best liquidated when it comes time to withdraw the money.
The simplest way to deal with an RRIF is to cash some or all of the investments and buy an annuity, usually from an insurance company. The annuity is then held inside the RRIF account and pays a guaranteed income for life or another set period of time to the investor, who pays taxes on the amounts received.
The downside of an annuity is that it can drain the retiree s savings, leaving nothing for the heirs, and there s no protection from the buying-power erosion of inflation, a growing threat given longer average lifespans.
Deciding on what asset mix to hold in your RRSP or RRIF is made more complicated by current low interest rates -- the classic 60-40 equity-fixed income split isn t necessarily what savers should be focused on.
"As life expectancies have pushed out, you want to make sure within the RRIF you re creating not only the income you need but also some growth, so if you live for a long time, you have enough money to draw on," McCreath said.
Popowich suggested investors should think in terms of placing their assets in "buckets" tagged income, growth, health and legacy.
As retirement nears, an investor should assign enough low-risk assets to the income bucket to fund his or her lifestyle (along with private and government pensions and other income sources) for the next 10 years or so.
Meanwhile, a second bucket should be filled with enough assets to be invested in higher-risk, higher-reward vehicles to generate larger returns with the goal of refilling that income bucket for when it s needed.
"It s almost impossible to maximize predictable, sustainable, tax-efficient income at the same time as maximizing growth," Popowich said. "Those are, in my opinion, mutually exclusive objectives."