RRIF rules have changed for 2020 tax year
Q: My wife and I are 76 years old. We receive CPP and OAS and I have a pension from my employer. Additionally, we both have a RRIF and take the minimum that we are forced to withdraw each year.
Because of the pandemic, we’re allowed to decrease our RRIF payments this year. Should we do it or not?
A: Due to the current crisis, the federal government established Canada’s COVID-19 Economic Response Plan, one aspect of which changes the rules for RRIF withdrawals for the 2020 tax year only.
Monies invested in your RRIF (Registered Retirement Income Fund) grow on a tax-free basis. But, the federal government sets a minimum amount that must be withdrawn from your RRIF each year, based on the balance in your RRIF and your age (or age of your spouse). The RRIF withdrawal is added to your other income, such as CPP, OAS, employer pension, and investment income, to determine your total taxable income for the year.
The Response Plan has reduced the mandatory minimum RRIF withdrawal by 25 per cent for 2020, which may benefit some retirees. The decrease is elective, so let’s look at the advantages, disadvantages and restrictions:
— If you need the RRIF income to support your lifestyle, then withdraw the normal amount for 2020.
— If you do not need that income, you can reduce your withdrawal to 75 per cent of the normal minimum for 2020.
— If you have already taken more than the new minimum amount, you cannot put the difference back into your RRIF.
— If you have already started your withdrawals and are below the new minimum for 2020, you can adjust the remaining amounts so that your total is reduced by 25 per cent.
— If you have already received the new minimum amount for 2020, you can stop any further withdrawals.
If you do not require more than the new minimum RRIF withdrawal amount, then you may wish to leave the excess 25 per cent in your RRIF to continue to grow and compound tax-free.
On the other hand, even if you don’t need the RRIF income to live on, you may still elect to withdraw the normal minimum amount and invest it in a TFSA (Tax-Free Savings Account). You’ll have paid the income tax on those monies in 2020 and any future growth will not be taxable in the TFSA, nor when it’s withdrawn from the TFSA. (That’s what makes it “tax-free.”)
If you have already used up the maximum contribution room in your TFSA (a total of $69,500 to the end of 2020), then you can still invest these monies outside of your RRIF or TFSA. Again, you’ll have already paid the income tax on those withdrawals from the RRIF in 2020, so you’ll pay tax only on future growth, not on the total amounts withdrawn from your investment account in the future.
You should also determine if electing the reduced amount decreases your overall tax rate. That is, the higher your total income, the greater percentage of each dollar of income that has to be remitted in income tax. This is called a “graduated tax rate” and the percentage of tax you pay falls within certain “tax brackets.” If you elect the 25 per cent reduction to your minimum RRIF amount, it may drop your total income into a lower tax bracket and reduce the percentage of each dollar of income you must remit to CRA. (Your tax preparer can help you determine if this applies to you.) If so, it will be beneficial to you to elect the 25 per cent decrease.
As you can see, there are several factors to consider in determining whether you should choose to decrease your RRIF withdrawal by 25 per cent for 2020. But don’t delay in determining what’s best for your unique financial situation; otherwise, it may be too late.
Thie Convery, R.F.P., CFP, CIM, FMA, FCSI, is a wealth adviser in Dundas. Her column appears bi-weekly in The Hamilton Spectator. You can reach her with questions at TheSpecMoney@gmail.com or by visiting www.ConveryWealth.com.