Fewer than half of working Canadians have a company pension plan. If you don't, your Registered Retirement Savings Plan (RRSP) may play a big role in giving you income after you retire. Here are some things you should know.
How do I convert the money in my RRSP to income?
1. Set up regular payments each month for the rest of your life by buying an annuity. With this choice, you can be certain about the income you will have.
2. Set up a special account and invest your savings.
You can move your RRSP savings to a special account called a Registered Retirement Income Fund (RRIF). You continue to invest your savings to try to make them grow, but you also take money out of your fund to live on. You must follow the rules about how much you must take out each year.
Tip: Most experts suggest that you wait as long as you can before you open a RRIF. You can take money right out of your RRSP if you need it for income. Also, if you have more than one RRSP, you can convert them into separate RRIFs or put them all in one self-directed plan. Then you will only have one account to make your withdrawals from each year.
3. Take a lump sum as cash.
For most people, this is not a good choice. You would have to report the lump sum on your income tax return. If you have a lot of RRSP savings, you may create a huge tax bill for yourself. Some Canadians (for example, low-income earners) may be better off closing their RRSP savings and investing outside a registered plan. Be sure to get expert advice before you choose this option.
Tip: You have to decide what to do with your RRSP by the end of the year in which you turn 71. The money cannot stay in an RRSP account after that. Experts say you should start planning what you?ll do a few years before you need the income.
Remember: You need to plan ahead to get the most from your RRSP
If you're not sure what to do, get expert advice. Don't wait until the year you turn 71 to decide. If you do nothing by the end of that year, you may have to close your account and take all your savings out as cash. That can lead to financial disaster.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.