Do you know someone with a Registered Savings Plan (RSP) and turning 71 – maybe your parents, brother or perhaps yourself? If you do, you should be aware of some decisions that have to be made to the Registered Savings Plan. The Income Tax Act says that you have to terminate your RSP’s by December 31st in the year you turn age 71. In doing so, you have three options:
1. You can withdraw all the funds in your RSP in one lump sum; however, this would be a fully taxable withdrawal for 2012. Unless you have a negligible amount in your registered plan, this is not a good option. This strategy defeats the whole plan in having an RSP in the first place.
2. You can transfer the balance of your Registered Savings Plan into a Retirement Income Fund (RIF). This is a simple process involving the tax-free transfer of the assets. You can keep the same investments you had before the transfer and nothing changes except for the fact you will now be drawing income from the RIF. The remaining funds will continue to accumulate tax-deferred.
3. You can use all or part of your RSP funds to purchase a life or term certain annuity. Partial use would give you a combination of a RIF and an annuity providing you guaranteed retirement income.
There are also three factors that should be taken into consideration in the year you turn 71:
1. You can make one last final contribution in your 71st year based on your RSP contribution limit. This contribution must be made by December 31st in the year you turn 71. You do not have until February 28 of the following year.
2. If you have a younger spouse and you are still earning income, you can continue to contribute to his or her RSP to the extent of your unused contribution room. You are able to do so until your spouse turns 71.
3. If you have unused contribution room that you have carried forward from previous years, this amount can be contributed in your last year as well. Again, you will only have until December 31st to make that contribution or it will be lost forever.
Call me if you have any questions with respect to your RSP planning or the switch from accumulation to income.