This past April the 2015 Federal Budget announcements unveiled new RRIF (Registered Retirement Income Fund) minimums for Canadians.
If you are currently drawing a retirement income from your RRIF, or if you are approaching age 71 when your RRSP must be converted to a RRIF, these new minimums will pertain to you.
For starters, let’s review at a very high level how the RRSP (Registered Retirement Savings Plan) and RRIF (Registered Retirement Income Fund) are connected and their general premise.
If you have an RRSP, your contributions act as a tax deduction each year and grow tax sheltered over time. For an RRSP to work best, you are taking a tax break today (while working at a higher tax bracket) in favour of paying the income tax on principal and growth at a later date (in retirement at a lower tax bracket) when you withdraw. Not everyone has an RRSP, and not everyone needs an RRSP but for some it is a valuable tax deferral tool if used properly and it fits your situation.
While the RRSP is a savings tool. The RRIF is an income tool. The RRSP is where you save the money, then convert to a RRIF where you withdraw the money.
You must convert your RRSP to a RRIF by the end of the calendar year in which you turn 71. Once in a RRIF there are minimum withdrawal rules which force a minimum amount of your money to be withdrawn from the RRIF annually and taxed as income.
Minimum withdrawal amounts are expressed as a percentage of your total RRIF portfolio that must be withdrawn in any given year. The minimums that once started at 7.38% at age 71 and increased annually with a maximum cap at 20% at age 94, have now been decreased starting at 5.28% at age 71 and increasing annually with a maximum cap at 20% at age 95.
So why the change? Over the years there has been some criticism and lobbying to lower RRIF withdrawal minimums on the premise they were creating the following challenges for some seniors:
- Being forced to take more money than needed to live on
- Desire to spread out their income as life expectancies are rising
- Greater risk of outliving your money
- RRIF withdrawals are fully taxable which may push a senior to a higher tax bracket
- Higher annual income may create an OAS (Old Age Security) clawback
RRIF minimums had become out of line with actual investment return averages in recent years. The last time they were adjusted was in 1992 when the real after-inflation 5 year GIC returns were around 4% versus an average of less than 2% today.
It’s no surprise the RRIF minimums were addressed in this most recent budget with the first baby boomers reaching 70 this year. And while even though these RRIF adjustments are seen by most as a small win for today’s seniors, it doesn’t mean that everyone will choose to lower their payments by any means. There is still much planning that needs to be done by the senior and the financial planner to see what balance is best suited for their situation. The biggest victory is simply for seniors to have more flexibility over how they withdraw their retirement income and utilize their resources in the most efficient way possible.
Other options to consider where your RRIF income levels are concerned include:
- If I lower RRIF payments now and draw less, am I leaving too much in the RRIF to possibly be taxed at the highest income tax rate through my estate when I pass away?
- Where is the balance between too much and too little?
- If I take higher payments now than I need to live on, can I still keep within a manageable tax bracket? Should I re-allocate some of those unused funds to my TFSA (Tax Free Savings Account)?
- How can I manage my income to utilize as much TFSA room as possible for greater control and flexibility to withdraw money without the tax consequences of a RRIF withdrawal?
These new minimums take effect for this 2015 calendar year. If you have an active RRIF and wish to switch to the new lower minimums for this year and going forward you have some options. Payments can be adjusted to the new minimums going forward.
If you have already received your maximum RRIF amount for the year, or more income from your RRIF than you want, you can re-contribute some of it back to meet the new minimums. In this case, you will be issued a T4RIF for the amount withdrawn and a corresponding 2015 contribution slip for the amount re-contributed. The deadline for this re-contribution is Feb 29th 2016.
If you currently have a RRIF, and will be impacted by these changes, your financial institution will send you a notice this fall to provide further details.
There is much to consider in the big picture for your retirement income needs and your personal situation. To figure out which of these options pertain to you, work with your financial advisor to do some calculations to see what the best strategy is for you and your retirement income.
Stephanie Farrow, B.A, CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc. About our Farrow Financial Team.