RRIF Planning Needed for Some Taxpayers
Arthur Drache, March 26, 2007
The decision by the government to allow RRSP contributions to age 71 is a welcome return to former rules which were jettisoned a decade or so ago in the name of fighting the deficit. This change also opens up some planning considerations.
All taxpayers under 71 will have a potential benefit, two more years of tax free-accumulation, two more years to get tax deductions for contributions and for younger workers, two more year in which unused contribution room can be utilized.
For those who have passed age 71 and who have created a registered retirement income fund (RRIF) there is no benefit available.
But it is important to note that those who are in the 69 to 71 age bracket, there are some substantial changes and planning opportunities available.
Let’s review the basics. Under the law in place on March 19, 2007 your RRSP “matured” by the end of the year in which you reach age 69. This meant that no further contributions or benefit accruals were permitted to or under such plans, and that benefits under the plans must generally begin to be paid, which may involve a transfer of the funds to a RRIF or the purchase of a qualifying annuity. If you have funds in a RRIF, the rules require a mandatory annual payout following a formula under the Income Tax Regulations.
The decision to extend the age in question to 71 has a number of implications.
Those who have not yet had to convert their RRSP can keep it in place until the year they turn 71.
But beyond the obvious new regime for those 69 and older, the budget proposes relief for those who reach 70 or 71 years of age in 2007.
. If contribution room is available, RRSP contributions will be permitted to be made in 2007 and 2008 for those who are 70, and in 2007 for those who are 71.
. In addition, the requirement that a specified minimum amount be withdrawn from a RRIF each year after the RRIF is established will be waived for 2007 and 2008 in the case of RRIF annuitants who turn 70 years of age in 2007, and for 2007 in the case of RRIF annuitants who turn 71 years of age in 2007.
. A RRIF annuitant who is 71 years of age or younger at the end of 2007 will be able to reconvert the RRIF to an RRSP, so long as the re-established RRSP is converted to a RRIF before the end of the taxation year in which the individual turns 71 years of age.
This latter point will be extremely useful for those who are in that age group and who still have either earned income in the prior tax year or have RRSP contribution room from earlier years which was not utilized before the RRSP had to be converted to a RRIF.
If you have already converted to a RRIF and do not want to make RRSP contributions, the second point above provides you with a holiday from the mandatory annual RRIF payout. Of course, if you are satisfied with your RRIF funding and if you need the cash which flows from it under the existing rules, there is no need to change.
Existing registered plan annuities will be permitted to be amended, without adverse tax consequences, to reflect the later conversion age.
So, for those 69 and under, nothing has to be done to get the benefits of the extension of contribution time. But if you are 70 or 71, you may want to talk to your tax or investment advisor as to what steps if any should be taken now. The decision as to what you should do is not a “one size fits all” but everybody in the applicable age group should at least give some thought as to what steps should be taken.