Canadians hold multiple RRSPs? Merging accounts may simplify management, reduce costs, and lower risks

For Canadians with multiple Registered Retirement Savings Plans (RRSPs), approaching retirement may be a good time to consider consolidating these scattered accounts to simplify investment management, reduce related costs, and better prepare for retirement.

People hold multiple RRSPs for various reasons. For example, they may not have transferred their former employer’s group RRSP into their personal account after leaving a job; they might have hurriedly made contributions before the deadline, leaving small “orphaned” accounts at certain financial institutions; or they may have opened accounts with different financial advisors. According to RRSP rules, individuals can open any number of plans, but the total contribution limit is fixed.

Jacqueline Power, Director of Tax and Retirement Research at Fidelity Investments Canada ULC in Toronto, notes that it is common for clients to have RRSPs with different advisors, regardless of their asset size. However, this dispersed management can cause inconveniences: clients need to keep separate receipts and tax documents for each account, and if each account charges annual management fees, overall costs can increase significantly.

Ms. Power explains that consolidating multiple RRSPs into a larger account can allow clients to benefit from lower fee structures. Such discounts are usually available when assets managed by the same institution or advisor reach a certain scale.

For those approaching or already retired, the benefits of consolidating RRSPs are especially significant. According to regulations, clients must convert their RRSPs into a Registered Retirement Income Fund (RRIF) by the end of the year they turn 71. RRIFs require minimum annual withdrawals based on age-specific tables, taken separately from each account. Holding multiple RRIFs makes managing these minimum withdrawal requirements more complex.

Jason Heath, Managing Director of Objective Financial Partners Inc. in Markham, Ontario, states that having a single RRIF account makes managing withdrawal requirements easier, and tracking income for tax purposes is simpler. He adds, “Multiple accounts can lead to missing documents, increasing compliance risks.”

Aurele Courcelles, Vice President of Tax and Estate Planning at IG Wealth Management Inc. in Winnipeg, points out from an estate planning perspective that consolidating retirement accounts simplifies processes. If a client becomes incapacitated or passes away, the authorized agent or executor must communicate with multiple financial institutions, whereas a single account can significantly reduce this burden.

Dispersed RRSPs can also affect clients’ overall asset allocation assessments. Courcelles notes that when assets are spread across different institutions, clients may find it difficult to evaluate whether their investment portfolio aligns with their retirement goals. After consolidating accounts, advisors can more accurately match risk tolerance and simplify rebalancing.

Heath further notes that clients with multiple small RRSPs tend to pay less attention to individual accounts. Psychologically, consolidating accounts can help enhance focus on retirement savings.

However, consolidating RRSPs is not always the best option. If a client has both personal RRSPs and spousal RRSPs, careful consideration is needed. According to the rules, personal RRSPs can be transferred into a spousal account, but the reverse is not permitted. Once consolidated, the account is considered a spousal RRSP and subject to attribution rules: if the spouse withdraws funds within three years of contribution, the withdrawal is typically taxed in the spouse’s name.

Ms. Power states that due to such tax implications, most clients choose to keep personal and spousal RRSPs separate.

When transferring RRSPs, clients have two options: a cash transfer, which requires selling investments within the account first, or an in-kind transfer, which allows the transfer of existing holdings directly. Heath prefers in-kind transfers, explaining, “Market fluctuations can affect investment value, and in-kind transfers ensure funds remain invested, avoiding timing risks associated with account conversions.”