Question

Question #3

One of your clients is turning 71 years old this year and, according to CRA rules, they must close their RRSP account by the end of the year. In an e-mail you inform your client of this CRA rule. You also inform the client that they now have three possible options regarding their RRSP account:

1. Close their RRSP account and take the cash. In this scenario the individual will have to have the entire amount of their RRSP to their income for the year. There will also be withholding tax. You are not recommending this option because it will result in a significant tax liability to your client.
2. Open up a Registered Retirement Income Fund (RRIF) account and transfer all of the investments in the RRSP to this new RRIF account, tax free. A small portion of the money in the RRIF account must be paid out to the investment each year (approximately 5%), which is taxable income to the RRIF account owner.
3. Use the money in the RRSP account to purchase an annuity, tax free. A life annuity must pay out to the investor a minimum amount each year for the rest of the investor’s life. The amount of the annuity payout is taxable income to the investor.

REQUIRED:

1. What factors would you take into consideration when deciding which of the three options would be best for your client.
2. Assume that the client agrees with you and does not like Option #1 (just close the RRSP account and pay tax on the total amount). Explain to your client two (2) advantages and two (2) disadvantages for Option #2 and #3 above.

Answer 1

Answer A

- As Client of Turning 71 the further Option should be selected based on the considering Age.

- TAX Liability as Withdrawing money will show as Income for which he have to pay the Taxes.

-Constant Income

-Purpose Based Money should be There.

Answer B

Option 2

Advantages:

- Tax Free as on the income there is no Need to pay Taxes.

- RRIF would Provie Great return Asit will Invest into the Stocks & Bonds.

Disadvantages:

- There is no Security of Consistent same Amount of return as it is based on Markets.

- As the Age of the client is high such kind of the investment would not provide high Monthly as compare to the Annuity.

Option 3

Advantages:

- Annuity Are single life annuity which provides Benefit to single person Till his Death

Where As it Provides Security That you will have Income Till Your Death.

- As Annuity is Purchased based on RRSP it will be consider as the Registered Annuity which have benefit of consistent Income.

Disadvantage:

- Based on Income Which Are getting from Annuity the Tax are Payable.

- The Return Are less on Investment A Compare to the RRIF Account.