ADVANCED LIFE DEFERRED ANNUITIES
If you own a registered retirement savings plan (RRSP), you must wind it up by the end of the year in which you turn 71.
At that point, you have the following options.
First, you can take out all the funds in one lump sum. However, since the funds will be fully included in your income in the year of withdrawal, this is usually not wise from a tax perspective. If the withdrawn amount is significant and puts you in the highest tax bracket, you may be paying 50% or more in tax, depending on your province of residence.
Second, you can transfer the funds to a registered retirement income fund (RRIF). This allows you to spread out your withdrawals over time. The RRIF rules require you to withdraw a minimum amount each year, which increases as you get older, and which is included in your income in the year of withdrawal. But since you can spread out the income over many years, the withdrawals might not put you in the highest tax bracket and thus you will likely pay less tax compared to the lump sum option.
Lastly, you can use the funds to acquire an annuity. Among other things, the annuity can be for the rest of your life, or for the rest of your life and your spouse’s (or common law partner’s) life. Generally, the annuity must make payments at least annually, and there are some limits as to the guaranteed term of the annuity. Similar to the RRIF option, this option can save you tax, assuming the annuity payments each year do not put you into the top tax bracket.
In the 2019 Federal Budget, the government introduced another option, which took effect as of January 1, 2020. This option was passed into law recently, as part of amendments made to the Income Tax Act in June 2021.
Under this option, you can transfer funds to acquire an “advanced life deferred annuity” (ALDA). In this case, you can defer receiving amounts from the ALDA, and therefore defer including in income such amounts, until the end of the year in which you reach any age you choose, up to age 85. This option is also available for amounts transferred from your RRIF, deferred profit sharing plan, and certain registered pension plans. (The terms of the particular plan may have to be amended to allow such transfers.)
Similar to regular annuities, the ALDA can be payable for your life or jointly for the lives of you and your spouse or partner. The amounts received each year from the ALDA are included in your income (or your spouse’s or partner’s income if you have deceased). The amounts must be paid at least annually.
However, there are monetary limits. In general terms, the amount used to acquire the ALDA in a year cannot exceed 25% of the value of the RRSP (or RRIF or other registered plan) at the end of the previous year. Furthermore, there is a lifetime limit to the amount you can use to acquire the ALDA. The lifetime limit is currently $150,000, indexed to inflation and bumped up to the next $10,000 increment as it passes the half-way point relative to the previous limit. For example, once the current limit is indexed and reaches $155,000 or more, the limit will be bumped up to $160,000. If you go over the limit, you will be subject to a penalty tax, generally equal to 1% per month times the excess over the limit.
When you die, the ALDA may provide a lump sum payment for your beneficiary under the ALDA contract. If the beneficiary is your spouse or partner, or a child or grandchild financially dependent upon you for support, the payment will be included in their income. (They may receive an offsetting deduction if they contribute the amount to their own RRSP, RRIF, or to acquire an annuity, subject to certain conditions.) If the beneficiary is anyone else, the lump sum is included in your income in the year of death.