End of year a good time to change RRIFS, LIFS

Waiting until January to alter your course of action could result in cash-flow issues

At this time of year, some thoughts begin to drift toward New Year’s resolutions. However, in the case of making changes to your Registered Retirement Income Funds (RRIFs) or Life Income Funds (LIFs), these resolutions are ideally made, and acted upon, now rather than waiting for a chorus of Auld Lang Syne on Dec. 31.

Possible changes to your RRIFs and LIFs that you might be considering include changing the investment manager or institution managing your plan. If you have been considering this for some time, acting before year-end is the time to move. The reason for this is that whenever a RRIF or LIF is transferred between institutions, the minimum RRIF or LIF payment must be fulfilled for the entire year before the institution holding your plan may release the funds. So, by doing the transfer at the end of the year, in most cases, you would have already received the minimum income for the entire year or, if not, you would need to receive the minimum by Dec. 31 at any rate. If you were to wait to do the transfer in January, then this delay would necessitate that the full year’s RRIF or LIF minimum payment would have to be made before the transfer would be allowed. This can foul up your cash flow while also fully dispersing your minimum before you have to, leaving less money in the plan to accumulate tax-deferred.

Another possible reason to make changes to your RRIFs or LIFs by year-end might be your desire to convert those funds into a life annuity.

Acting before year-end is the time to move.

Fixed income investors are finding it increasingly difficult to create income within their RRIFs and LIFs using bond and GIC interest income since rates are so low. This results in a faster erosion of capital, particularly as the RRIF and LIF minimum income percentages rise with advancing age. To provide for a certainty of lifetime income in retirement, older RRIF and LIF holders can turn to life annuities as potential solutions. The older you are at the time of applying, the higher the payout, as age is one of the determining factors as to the annuity payout calculation. For example, currently, a 71-year-old man could expect an annuity income of $694 per month based on a $100,000 deposit, while a female of the same age would receive $596 per month. Compare this with 81-year-olds who would enjoy monthly annuity incomes of $973 and $864 for a male and female, respectively.

Converting your RRIFs or LIFs to an annuity by yearend allows you to convert the full current value of the plan into this income solution (less any outstanding minimum for the year). Waiting until January to convert creates the problem that the full minimum RRIF or LIF income for the year would have to be paid out before the transfer of the remaining funds into an annuity, giving less capital to deposit into the annuity and therefore less annuity income as well.

Also, if you are still under age 71 and feel that you really do not need the RRIF income and want to reduce your taxable income, you can transfer these funds back into an RRSP. Perhaps you recently came into some sort of windfall, such as an inheritance, and have discovered your income is too high. Converting back into a savings vehicle from an income vehicle is one way to shelter these funds once again until the end of the year you turn age 71, when you would be obliged to convert back to a RRIF. Doing this conversion now protects additional funds rather than waiting until January to do so, which again would trigger the necessity of the minimum payout before transferring back into a RRSP. You may also be able to transfer your LIF into a LIRA, depending on the jurisdiction that governs the plan.

Finally, RRSPs and LIRAs are not available after the year in which you turn 71. If you have turned age 71 in 2012, you should decide which maturity option best suits your needs. Whether it be converting your RRSP or LIRA into a RRIF or LIF, respectively, or purchasing an annuity, you will need to make this decision by Dec. 31. Yet another reason to get going before you crack open the bubbly. Happy New Year!