So you saved in an RRSP; how about spending it? MICHAEL LANDRY Most physicians are aware of the nice. ties of investing in a registered retirement savings plan, but few know the facts about withdrawing their funds during retirement. The idea of providing a tax deduction for RRSP contributions was to provide an incentive to save enough to fund a pension guaranteed for life. For the self-employed, including most physicians, contributions up to 20% of earned income are tax deductible to a maximum of $5500. Persons in an employer-sponsored plan are limited to an annual deduction of $3500 for both the employer plan and RRSP combined. In addition, a taxpayer can reinvest all or part of the income from pensions, including old age security and Canada Pension Plan. The Income Tax Act stipulates that the RRSP must provide a pension for life. Pension payments must start before the annuitant's 71st birthday and are fully taxable as they are received. Because pensions can only be purchased from life insurance companies, physicians who have accumulated their savings with one or more trusteed plans (trust company, CMARSP, mutual fund, self-administered etc.) the accumulated lump sum from each plan must be transferred to a life insurance company at retirement. A taxpayer owning an RRSP with a life insurance company may convert the accumulated benefits to an annuity based on that particular company's current rate or transferring to another company (providing the contract allows transfers out) currently offering better annuity rates. The income per month available for any given lump sum fluctuates according to going long-term interest rates at the time the annuity is arranged. Once the pension is purchased the monthly payment is fixed for life regardless of future changes in interest rates. It is wise to shop around before deciding on one company. We have seen variations on annuity quotations of over 25%. The RRSP pension (commonly referred to as annuity payment) may be for the life of the planholder or for the lives of the planholder and spouse, that 1044 CMA JOURNAL/NOVEMBER 20,
is, payments continue for the length of the longer life. Also there may be a guaranteed payment for any number of years up to 15. For example, a life annuity guaranteed for at least 10 years is an annuity guaranteed for the lifetime of the annuitant with the further guarantee that, if the annuitant dies before he has received 120 monthly annuity payments, the balance of these payments will be continued to his beneficiary or beneficiaries. In a joint life and last survivor annuity, an annuity of a reduced amount is payable during the joint lifetime of the annuitant and his spouse and continues after the death of one of them for the remaining lifetime of the survivor. The reduction in the amount of the monthly annuity payment will be less if it is arranged that payments to the survivor will be less than the amount payable to the two lives jointly. Various permutations of these provisions are available. During the 1960s the stock market appeared to be an excellent hedge against inflation. This resulted in a considerable amount of interest in annuity contracts which were tied directly to the stock market. At that time interest rates were 3 to 4% less than they are to-day; consequently fixed monthly annuity cheques for a given sum of money were 25 to 30% less than they are to-day. These low interest rates, together with a strong stock market plus rising inflation popularized the variable annuity approach. The fixed annuity payment is based on long-term interest rates when the annuity is purchased. The variable annuity payment is based on corporation stock dividends plus variations in the stock market each year. In other words, an assumed rate of appreciation for the variable annuity replaces the fixed interest rate. To-day fixed annuity payments are based on interest rates of 9 and 10%. Variable annuities are only of interest to those who feel stock market appreciation plus dividends will on average equal at least 9½ % per year. 1976/VOL. 115
The fact that a registered retirement savings plan can be deregistered at any time so long as the total accumulated benefits of that particular plan are reported as income for the year provides an alternative to purchasing an annuity. A taxpayer contemplating retirement could have his money paid back over a specific number of years. For example, a physician who wants to receive the income over a 6-year period could divide the accumulated value of the plan by six and transfer five of these portions to five new plans. This would give him six plans altogether. Each year for the next 6 years, one plan would be deregistered. Those planning on retiring outside Canada might want to deregister their plans once they become nonresidents. Unless a treaty exists between Canada and another country, a 25% withholding tax is levied before the funds are forwarded to the planholder. In cases where a treaty exists, the rate of withholding tax can be as little as 15%. Naturally, the total tax payable on the deregistered funds will depend on the tax situation in the country of residence. Some experts familiar with US tax law believe that it is at present possible to have taxes waived on the total accumulated value in the RRSP. Apparently if a person just prior to moving to the US purchases his life annuity from a company other than the one administering the RRSP, the tax consequences are rather startling. The life insurance company is not required to withhold tax on the annuity payments. As well, for US tax purposes, the transfer from one plan to another prior to leaving Canada is considered to be a capital contribution to a pension plan and as such is not taxable. Only the interest portion of the annuity from the time the payments begin is taxable. Before packing your bags and retiring to Miami, we would suggest that the reader consider the nonmonetary aspects of such a move. If the idea still appeals to you, make sure that you consult a tax expert who is familiar with the US tax law.E
is, payments continue for the length of the longer life. Also there may be a guaranteed payment for any number of years up to 15. For example, a life annuity guaranteed for at least 10 years is an annuity guaranteed for the lifetime of the annuitant with the further guarantee that, if the annuitant dies before he has received 120 monthly annuity payments, the balance of these payments will be continued to his beneficiary or beneficiaries. In a joint life and last survivor annuity, an annuity of a reduced amount is payable during the joint lifetime of the annuitant and his spouse and continues after the death of one of them for the remaining lifetime of the survivor. The reduction in the amount of the monthly annuity payment will be less if it is arranged that payments to the survivor will be less than the amount payable to the two lives jointly. Various permutations of these provisions are available. During the 1960s the stock market appeared to be an excellent hedge against inflation. This resulted in a considerable amount of interest in annuity contracts which were tied directly to the stock market. At that time interest rates were 3 to 4% less than they are to-day; consequently fixed monthly annuity cheques for a given sum of money were 25 to 30% less than they are to-day. These low interest rates, together with a strong stock market plus rising inflation popularized the variable annuity approach. The fixed annuity payment is based on long-term interest rates when the annuity is purchased. The variable annuity payment is based on corporation stock dividends plus variations in the stock market each year. In other words, an assumed rate of appreciation for the variable annuity replaces the fixed interest rate. To-day fixed annuity payments are based on interest rates of 9 and 10%. Variable annuities are only of interest to those who feel stock market appreciation plus dividends will on average equal at least 9½ % per year. 1976/VOL. 115
The fact that a registered retirement savings plan can be deregistered at any time so long as the total accumulated benefits of that particular plan are reported as income for the year provides an alternative to purchasing an annuity. A taxpayer contemplating retirement could have his money paid back over a specific number of years. For example, a physician who wants to receive the income over a 6-year period could divide the accumulated value of the plan by six and transfer five of these portions to five new plans. This would give him six plans altogether. Each year for the next 6 years, one plan would be deregistered. Those planning on retiring outside Canada might want to deregister their plans once they become nonresidents. Unless a treaty exists between Canada and another country, a 25% withholding tax is levied before the funds are forwarded to the planholder. In cases where a treaty exists, the rate of withholding tax can be as little as 15%. Naturally, the total tax payable on the deregistered funds will depend on the tax situation in the country of residence. Some experts familiar with US tax law believe that it is at present possible to have taxes waived on the total accumulated value in the RRSP. Apparently if a person just prior to moving to the US purchases his life annuity from a company other than the one administering the RRSP, the tax consequences are rather startling. The life insurance company is not required to withhold tax on the annuity payments. As well, for US tax purposes, the transfer from one plan to another prior to leaving Canada is considered to be a capital contribution to a pension plan and as such is not taxable. Only the interest portion of the annuity from the time the payments begin is taxable. Before packing your bags and retiring to Miami, we would suggest that the reader consider the nonmonetary aspects of such a move. If the idea still appeals to you, make sure that you consult a tax expert who is familiar with the US tax law.E
