At midnight on December 31, registered retirement savings plan (RRSP) holders who turned 71 in 2014 won’t just ring in a new year, they’ll switch from “savings” to “income” mode. Their RRSPs will mature and their retirement income options must be in place—all before the clock strikes 12. For those who want to top up their savings or have yet to choose their options, the countdown’s on. Here’s how to help them start the new year off right.
Encourage a final contribution – Clients with unused RRSP contribution room may want to make a final RRSP contribution. Not only would they boost their savings, this could be their last chance for a large tax deduction in one year. Just remember: this contribution has a strict December 31, 2014 deadline (unlike other years where they could contribute until March of a new year to claim a tax deduction for the previous year).
Consider an RRSP overcontribution – Clients who’ve maximized their RRSP contributions but are earning an income may want to make a one-time RRSP overcontribution based on their 2014 earnings. Income earned in 2014 generates additional RRSP contribution room for 2015, regardless of age. A 71-year-old’s overcontribution in December 2014 (before winding down their RRSP and beyond the allowed $2,000 lifetime overcontribution limit) will result in a one per cent penalty on the excess amount for December. But because of the new RRSP contribution room they’re entitled to, as of January 1, 2015:
- the penalty ends in January 2015, and
- clients can deduct the overcontribution on their 2015 (or a future year’s) return.
Ultimately, the tax savings on an overcontribution will far outweigh the one per cent penalty.
Suggest a spousal RRSP – After age 71, clients may want to consider a spousal RRSP. As long as they have unused RRSP contribution room and their spouse or common-law partner is 71 or younger, they can contribute to a spousal RRSP and deduct it from their own tax return.
Discuss the options – Registered retirement income fund (RRIF)? Annuity? Cash? When discussing retirement income options with your clients, encourage them to consider their investment style, risk tolerance and income needs carefully.
- RRIFs – RRIFs can hold the same kinds of investments as RRSPs—guaranteed investment certificates (GICs), mutual funds, segregated funds, stocks, bonds, etc.—giving clients the opportunity to maintain their RRSP investment philosophy. Money in a RRIF continues to grow tax-free as long as it stays in the plan. And as long as clients meet the minimum withdrawal requirements, they can decide how much money to withdraw from their RRIF each year. Because clients can use either their age or their partner’s age to calculate their RRIF minimum payment, if they want to maximize their ability to defer taxes, suggest using the younger person’s age. A lower age means a lower minimum payment—and a longer period of tax deferral.
- Annuities – According to the 2014 Sun Life Canadian Unretirement Index, 97 per cent of Canadians say they want some of their retirement income guaranteed. Annuities provide guaranteed income for life and can help cover your clients’ basic expenses. Not unlike a paycheque, with an annuity clients know exactly how much income they’ll receive every month—regular payment amounts are locked in—and there are no investment decisions involved. For many, annuities are an easy, worry-free solution that encourage peace of mind.
- Cash – Cash provides “instant income”—but at a cost. Clients who cash out their savings could face a hefty tax bill in 2015, losing much of the money they intended for retirement.
Propose a product mix – RRIFs offer growth potential; annuities offer guarantees. A retirement income portfolio that combines both is often the right approach—especially for anyone concerned about outliving their RRIF income. Allocating 25 per cent to a payout annuity is a good place to start the discussion.
As 2014 comes to a close, some clients still have big decisions to make. Now’s the time to connect, offer suggestions, help them choose—and ring in a happy new year!