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My latest MoneySense Retired Money column looks at a specific Covid-19 measure the federal Government provided to seniors with RRIFs: the option to take 25% less than usually required in 2020. you can get full details by clicking on the highlighted text: Should retirees reduce RRIF payments during COVID-19?
Normally, seniors must convert their RRSPs to a RRIF or a registered annuity before the end of the calendar year they turn 71. Then they must start withdrawing a certain mandated annual percentage of the value of the RRIF each year, starting the year after it was set up. In recent years, it has started at a 5.28% rate at age 71, rising steadily until it hits 20% at age 95.
These withdrawals are fully taxable, and there have been concerns that this may deplete capital faster than can be replenished by the miniscule returns on fixed income.
On March 25, 2020, soon after the Coronavirus panic became apparent, the federal government’s COVID-19 Economic Response Plan gave RRIF owners the option of taking 25% less than the mandated annual minimums in 2020. (This also applies to Life Income Funds and locked-in RRIFs.)
Matthew Ardrey, vice president and wealth advisor with Toronto-based Tridelta Financial, cites the hypothetical example of Dave, who has $100,000 in his RRIF on Jan 1. 2020 and turns 72 later in 2020. Normally his 5.4% minimum withdrawal would be $5,400 but with the change in legislation he can choose to take out just 4.05%, or $4,050. He can also choose to take more than the minimum if he wants.
Various reasons to take out less than required
Why go this route? The main reason is to reduce taxes payable for the year, keeping in mind RRIF payments are fully taxable income. RRIF income may impact OAS benefit repayments: a client near the OAS threshold for repayment may end up under that threshold it if the election is chosen.
Apart from tax and OAS considerations, there may be valid investment reasons. If the RRIF holder is heavy in equities and underwater after market declines, Ardrey says the reduced minimums may give the portfolio a chance to recover, and on a tax-deferred basis.
Aaron Hector, vice president of Calgary-based Doherty Bryant Financial Strategists, says that for those already taking out more than their required RRIF minimum payment each year, “this entire policy should be a non-issue. This is only relevant for those who have been only taking out their minimum RRIF payments each year.”
Who is in the best position to accept these reduced RRIF withdrawals? Hector says it’s those with the flexibility to fund their lifestyles from other sources, those in high marginal tax brackets, and those exposed to income-tested benefits like OAS and GIS. In short, “anyone who wants to defer tax into the future could look to take advantage of the reduction.”
And who should not take the RRIF reduction? Those currently taking out more than their minimum payment, or who rely exclusively on their “current” minimum RRIF payments to fund their lifestyle, and those who do not have enough taxable income to fully utilize their tax credits. For a hint, Hector suggests looking at your tax records for the past couple of years: “If you never have any Federal or Provincial tax payable, then you don’t need to reduce your RRIF withdrawals for tax reasons.”
My thoughts on this would be to NOT take advantage of the 25% reduction, but to see the crash as a tax advantage, for some. The amount of rrif withdrawal right now, has a certain tax hit. Given an assumption of market recovery, the tax hit is actually smaller in relation to your asset, post recovery. You’ve gotten more out of your rrif at a lower tax rate.
Provided of course, you are not spending the rrif redemption, which locks in your loss.