For clients who blow out 69 birthday candles in 2006, this coming New Year’s Eve means not only a whole new year but also a whole new retirement income plan. The deadline to convert RRSPs falls on Dec. 31, but planning for conversion needs to start long before the festive season.

In the countdown to deciding whether to convert an RRSP to a registered retirement income fund, an annuity or cash, there are many factors to be evaluated.

“You need to consider the overall financial situation, in terms of what the client has in other assets aside from RRSPs,” says Jack Morris, a certified financial planner and professional retirement planner at Morris Financial Group Inc. in Winnipeg. “You should be taking into consideration tax issues and lifestyle issues.”

These issues, such as the client’s health and whether there is a spouse or other dependents, will indicate what should be done with an RRSP.

> Registered Retirement Income Fund. Whether in stocks, bonds, term deposits or other holdings, the investments in an RRSP can be transferred directly into a RRIF without being sold. This allows some continuity for clients’ investments, says Melanie Spokes, a CPF and PRP with Affinity Credit Union in Regina.

“Clients still have the potential to earn whatever income they were earning on the principal they had before,” Spokes says. “Also, the money stays taxed-sheltered, so clients are only taxed on the money that is taken out of the RRIF.”

The federal government specifies an age-specific percentage that must be withdrawn from the RRIF each year, starting the year after the RRIF is purchased.

“One of the advantages of a RRIF is the fact that clients have complete flexibility: they can take out as little as they want, as long as they meet the minimum withdrawal for the year,” Spokes says. “Or, clients can take out as much as they want, just realizing that they pay taxes on what they take out. And the client can change it year to year.”

A RRIF has to be depleted by the time the client reaches age 100. This is facilitated by annual increases in the minimum percentage required to be withdrawn each year. And if a RRIF outlives its owner, the remainder can be passed on to a beneficiary.

“Inside a RRIF, if the client names a spouse as beneficiary, if the owner passes away, the money rolls tax-free into a RRIF in the spouse’s name,” Spokes says. “If that spouse passes away, it is taxed, but the remaining amount goes to the estate or the beneficiary. So, it works well for estate planning.”

> Annuity. For clients who want set payouts that will last the remainder of their lives, free from the influences of interest rates and market activity, an annuity can be purchased through an insurance company. It’s necessary to cash in RRSP investments to purchase the annuity. Unlike a RRIF, an annuity retains the set dollar value that was purchased.

While the client can opt for monthly or annual payments, the insurance company will decide the amount of the payments based on an actuarial calculation of life expectancy. That payment amount is set for the remainder of the client’s life.

“A single-premium immediate annuity that’s coming out of a registered plan such as an RRSP is like a monthly income — like a personal pension,” Morris says. “It has a multitude of options, because the holder can have guaranteed periods, joint survivor benefits or life-only benefits.”

“The insurance company has committed that it will give the client that amount of money,” Spokes says. “If the client outlives the years that the insurance company thought the client would live, he or she still gets that [regular payment]. So, the client is getting money out that he or she never put in.

“But the opposite happens if the client passes away earlier. If the client passes away at 73 instead of age 83, the insurance company keeps the rest of the money.”

However, there are options that guarantee a payment to the estate for five- or 10-year periods, or that guarantee the principal amount. Spokes describes these as being similar to buying an insurance policy with different riders available. But the more options that are utilized, the more the cost goes up.

@page_break@> Cash. As a final option, clients can withdraw all of the funds from an RRSP, at intervals or at once, subject to taxes. Any amount left in the plan at the conversion deadline is automatically collapsed and taxes are triggered on the amount.

This can be an expensive option.

But whatever choice is made, both Morris and Spokes agree: the successful conversion of RRSPs comes down to knowing the client’s retirement lifestyle needs, desires and decisions. E