COVID Relief on RRIF Withdrawals
By Evelyn Jacks
Evelyn Jacks is the author of 55 books on tax planning and wealth management and Founder and President of Knowledge Bureau
The recent pandemic crisis brought about a change for seniors who are required to withdraw a minimum amount from their RRIF and add it to their taxable income in 2020. Specifically, seniors may take out 25% less than the normal mandatory prescribed withdrawal amount. But there have been some timing issues, which may not fully address the long-term effects on savings. That’s where the advice of a financial planner can close the gap.
An RRSP must be “matured” or converted to a retirement income vehicle such as an annuity or RRIF by the end of the year in which the RRSP holder turns 71. If a RRIF is chosen as the vehicle, a minimum amount must be withdrawn each year after establishing the RRIF. No contributions may be made to a RRIF other than transfers from other registered accounts, but the rules governing qualifying investments that can be made in a RRIF are the same as for RRSPs.
The minimum withdrawal factors, which have been in place since 1992, are based on a prescribed percentage outlined in the Income Tax Act, multiplied by the value of the assets in the RRIF.
Several adjustments have been made to the rules since inception. For example, in 2007, the age limit for starting taxable pension payments from an RRSP was increased from age 69 to 71. Under general rules, which were in effect until 2014, the RRIF holder had to withdraw 7.38% of their RRIF in the first year. The factor increased gradually until age 94 when it was capped at 20% per year. Then in 2015, the minimum withdrawal factors were again adjusted to better reflect historical rates of return and the expected inflation rate (5% and 2% respectively).
Incidentally, most people don’t know that this change also applies to variable benefit payments from a Registered Pension Plan (RPP) and a Pooled Registered Pension Plan (PRPP), but not to minimum withdrawals from Individual Pension Plans (IPPs).
The Pandemic Relief – Why is this provision important?
The answer lies both in current and future income and wealth planning opportunities. First is the effect of the change on capital preservation.
The pandemic brought a sudden and extreme market fluctuation as the economy ground to a halt. The government rightly acknowledged it was unfair to require seniors to withdraw RRIF funds during such a meltdown. But did the withdrawal relief come soon enough and in the right amount? Unfortunately, for seniors who withdrew the required minimum before the changes were announced on March 25, 2020, and any funds withdrawn over the reduced maximum, the excess cannot be recontributed to their RRIF.
The effect on the portfolio and its long-term growth potential should be reviewed to determine if there are any damage-reversal opportunities.
On the positive side, reduced withdrawals after March 25 can help seniors preserve remaining RRIF accumulations. They can be sheltered longer and through a market recovery period. Seniors also have greater flexibility over the way the money is withdrawn; that is, they can choose to withdraw only the reduced minimum amount, or they can withdraw more, if the money is needed, or if that makes sense from a tax planning point of view.
There are other benefits to a lower RRIF income withdrawal. As taxable income will consequently be lower in 2020, taxes payable will be lower, too; so will quarterly instalment remittances required.
A lower net income may also result in an increase in OAS payments, if subject to a high-income clawback. Pension income splitting with a spouse will bring better results, too, with a ripple effect: other refundable and non-refundable tax credits may be increased.
Note that both the reduction in the OAS clawback amounts and the increase in non-refundable credits will affect the 2020 tax return filed next year, but refundable credits, like the GST/HST Credit, and OAS benefits, will not increase until July 2021.
Speak to your financial advisor about the planning opportunities you may have to reduce taxable income in 2020 and preserve wealth for what could be an uncertain future.
History of RRIF Mandatory Income Reporting Rules
*At age 95 the withdrawal rate is .20, for 2020 only: .15
Source: Knowledge Bureau, Inc. Reference Income Tax Regulations 7308
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This article is written by Evelyn Jacks and is provided for information purposes only. To the extent this article contains information or data obtained from third party sources, it is believed to be accurate and reliable as of the date of publication, but 1832 Asset Management L.P. does not guarantee its accuracy or reliability. Nothing in this article is or should be relied upon as a promise or representation as to the future. The view and opinions expressed by the author are those of the author and are not those of 1832 Asset Management L.P.
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