Multiple RRSPs can lead to administrative headaches for clients, as they must track contributions and tax slips for each plan.graffoto8/iStockPhoto / Getty Images
Canadians with multiple registered retirement savings plans may want to consolidate those accounts to make managing investments easier and reduce administrative costs and hassle, especially as retirement approaches.
There are many reasons someone may end up having multiple RRSPs.
A person might leave a job with a group RRSP program and then not transfer their plan to a primary personal RRSP; they might have a small “orphan” RRSP with a financial institution after making a last-minute contribution or securing an RRSP loan; or they might choose to open RRSPs with two or more financial advisors at different firms. (RRSP rules allow people to open as many plans as they want, though their total contribution room remains the same.)
Clients opening RRSPs with different advisors “happens a lot, across the board, whether [the client] is high-net-worth or not,” says Jacqueline Power, director of tax and retirement research with Fidelity Investments Canada ULC in Toronto.
Multiple RRSPs can lead to administrative headaches for clients, as they must track contribution receipts and tax slips for each plan. They could also lead to higher costs if the clients are charged annual administrative fees on each account.
Consolidating RRSPs into a single larger plan might allow a client to access a lower-fee structure that kicks in only when assets with one provider or advisor exceed a certain threshold, Ms. Power says.
Merging RRSPs before retirement
Clients approaching retirement and those already retired would particularly benefit from consolidating RRSPs.
Clients must convert an RRSP into a registered retirement income fund (RRIF) by the end of the year in which they turn 71 years of age. The rules governing RRIFs require an annual minimum to be withdrawn, based on a schedule by age, from each account separately, as opposed to a cumulative amount from one RRIF to cover all the accounts.
As such, it’s easier for clients to manage the minimum annual withdrawal requirement when they have only one RRIF as opposed to multiple plans, says Jason Heath, managing director with Objective Financial Partners Inc. in Markham, Ont.
Tracking tax slips for reporting RRIF income on tax returns is also simpler when a client has just one RRIF, he says. “Sometimes you end up missing [slips] if you have multiple RRIF accounts.”
It’s also beneficial to consolidate retirement accounts as part of estate planning, says Aurele Courcelles, vice-president, tax and estate planning, with IG Wealth Management Inc. in Winnipeg.
“If you have four [RRSPs] and you become incapacitated or pass away, [a power of attorney or an executor] now has to step into your shoes and deal with four different financial institutions,” he says.
The full picture
Multiple RRSPs “scattered” over different providers make it challenging to get a clear picture of a client’s asset allocation and whether it suits their retirement goals, Mr. Courcelles says.
Consolidating plans helps advisors align a client’s portfolio strategy with their risk level and makes rebalancing easier, he adds.
Mr. Heath notes that people with two, three, or more smaller RRSPs may not pay as much attention to each plan as they would to a larger, merged plan.
“Even psychologically, there’s a benefit to having your accounts consolidated,” he says.
Merging personal and spousal RRSPs
One circumstance in which it might make sense to keep RRSPs separate is when a client has a personal RRSP and a spousal RRSP.
A personal RRSP can be transferred to a spousal RRSP (but not the other way around) if the annuitant (the owner) of both plans is the same.
However, the merged RRSP will be treated as a spousal RRSP and be subject to the “attribution” rules governing those plans. Under those rules, a withdrawal, generally, is taxable to the annuitant’s spouse if the withdrawal is made within three years of the spouse contributing to a spousal plan.
For this reason, most clients choose not to merge personal and spousal RRSPs, Ms. Power says.
Transferring RRSPs in cash or in-kind
Clients can transfer an RRSP to another plan either in cash, by first selling the investments in the plan, or “in kind,” meaning the RRSP is transferred with the investment holdings in place.
Mr. Heath says he prefers transferring clients’ RRSPs in-kind, where possible.
“Sometimes, when you’re doing a transfer from one account to another, there can be a delay – it can take a while,” he says. “If you want to make sure your money stays invested, whether markets go up or down, transferring in-kind makes sense.”