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Navigating the 'decumulation' maze is a puzzle

Most people are consumed with the accumulation phase of saving for retirement — where to find the money, what type of accounts to put it into, and into which asset classes.

Most people are consumed with the accumulation phase of saving for retirement — where to find the money, what type of accounts to put it into, and into which asset classes. But “decumulation” – the process of withdrawing savings to provide retirement income – can be even trickier.

A transfer of funds from my Tax Free Savings Account with a direct brokerage took a week to find its way into an account at my bank. Also, for three weeks some $43,000 of my retirement savings was in some computer cloud, as a transfer between two financial institutions broke down, with both firms claiming they didn't have the money. In another matter, I received a phone call from Canada Revenue Agency, trying to sort out an issue that began three years ago with one of my income tax clients, who gave instructions to transfer her Registered Retirement Savings Plan from an investment firm to her bank, but the money was mistakenly moved into a non-registered savings account and CRA taxed her on what was incorrectly handled by the institutions as an RRSP withdrawal.

More than a decade ago financial institutions operated under “T-plus-5” regulations, meaning that any purchase or sale of a stock, bond or mutual fund had to be completed on a settlement day that was within five business days after the day the trade was made. The movement from manual to electronic trading allowed rules to be changed to the current “T-plus-3” system, but given the increasing speed of electronic processing the rule should be “T-plus-1.”

Speed of transactions is important when money is needed quickly. I recently sold some TFSA holdings to help purchase a condo. The stocks were converted into cash in my TFSA account within a day, but since I didn't have a savings account with the investment firm, they had to create a new cash account for me, move the money from my TFSA into my cash account, and then move the money into my bank account three business days later. The process took a week.

The mystery of my $43,000 was much more perplexing. These days many people work with different companies during their careers, and as they leave a company pension plan they often put the money into a Locked-In Retirement Account (LIRA). After age 50, Albertans can start taking the money out by transferring it into a Locked-In Income Fund (LIF) or a life annuity. At the time of converting the LIRA to an income stream – and only then – they may be able to unlock 50 per cent of the LIRA and transfer that amount into their RRSP, depending on which province their original company pension was registered in. While there are yearly maximum limits of how much money you can take out of a LIF, there are yearly minimums you must take out of a RRIF but you can take out more, which offers more flexibility.

In my case, for three weeks some $43,000 in a dividend mutual fund didn't appear in my accounts at either firm I was transferring between. At long last it was discovered that one transfer form I filled out hadn't been passed along between the firms. The good news was that the transfer wasn't made in cash, but as a transfer “in kind” of units of the mutual fund. That meant I didn't lose out on a $1,300 increase in value of the units during the Donald Trump post-election stock market rally.

People starting to withdraw their retirement savings should begin the process well in advance, and ride herd on the financial institutions they are dealing with. Check your accounts regularly, and if money is missing or has gone into the wrong type of account, call the firm involved. In the case of a transfer between accounts at different companies, get them to talk to each other and track down the status and whereabouts of your investment.

While you do not have to convert an RRSP or LIRA to an income stream until the end of the year you turn 71, starting regular withdrawals earlier will likely reduce the tax you pay, as you claim the $2,000 pension income amount tax credit annually.

Ray Turchansky is an income tax preparer.