By December 31st of your 71st year, you no longer can own an RRSP. So, by that date, you must either:
- Cash it out and pay the tax
- Liquidate your RRSP investments and purchase a life time annuity with the proceeds
- Transfer the existing investments to a new RRIF
For most people, the third option is by far the best. Cashing out typically incurs a lot of tax and sacrifices tax-deferred investment income for the rest of your life. Purchasing an annuity has two problems; first, you may be liquidating all of your investments at a bad time and; second, effectively you will be locking in an annuity investment at the prevailing interest rates for the rest of your life.
Symbolically, creating a RRIF merely involves scratching the word “RRSP” off your monthly statement and replacing it with the word “RRIF”. You still own all of the same investments. Your investment strategy needn’t change. The strategy you built through your ’60s should now commence to bear the fruit of funding an annual pension payment to you.
Practically speaking, you will need to open a new RRIF account by December 31st of your 71st year and arrange for the transfer of your investments from the old RRSP to the new RRIF. That’s it!
The only significant differences between a RRIF and an RRSP are:
- You are obliged to take a prescribed minimum amount out of the RRIF every year and pay tax on this. You are never obliged to take money out of an RRSP.
- You cannot contribute any new money to a RRIF. A RRIF can only grow by the return on the investments in it.