New RRIF with­drawal rules gives se­niors more flex­i­bil­ity

Vancouver Sun - - FI­NAN­CIAL POST - JAMIE GOLOMBEK Jamie.golombek@cibc.com Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Manag­ing Direc­tor, Tax & Es­tate Plan­ning with CIBC Pri­vate Wealth Man­age­ment in Toronto.

Last month, the gov­ern­ment passed leg­is­la­tion that low­ered the min­i­mum amount that must be with­drawn from a Reg­is­tered Re­tire­ment In­come Fund (RRIF) in 2020 by 25 per cent “in recog­ni­tion of volatile mar­ket con­di­tions and their im­pact on many se­niors’ re­tire­ment sav­ings.” While some have ar­gued that RRIF with­drawals should be sus­pended al­to­gether for 2020, so far, the only re­lief of­fi­cially an­nounced is the 25 per cent re­duc­tion. Here’s what you need to know.

HOW DOES IT WORK?

You must con­vert your Reg­is­tered Re­tire­ment Sav­ings Plan (RRSP) to ei­ther a RRIF or a reg­is­tered an­nu­ity be­fore the end of the year you turn 71. While you may keep the same in­vest­ments as an RRSP and en­joy con­tin­ued tax de­fer­ral on the funds in an RRIF, you must with­draw at least the re­quired min­i­mum amount an­nu­ally from your RRIF, start­ing in the year af­ter you set it up.

The re­quired min­i­mum amount is based on a per­cent­age fac­tor, of­ten re­ferred to as the “RRIF fac­tor,” mul­ti­plied by the fair mar­ket value of your RRIF as­sets on Jan. 1 each year. For ex­am­ple, if you have $100,000 in your RRIF and you were 71 at the be­gin­ning of the year (i.e. Jan­uary 1), you must nor­mally with­draw $5,280 (5.28 per cent times $100,000) in the year. The RRIF fac­tor in­creases each year un­til age 95, when the per­cent­age is capped at 20 per cent.

On March 25, 2020, the gov­ern­ment passed leg­is­la­tion as part of the Gov­ern­ment of Canada’s COVID-19 Eco­nomic Re­sponse Plan that de­creases the re­quired min­i­mum with­drawals from RRIFS by 25 per cent for 2020. The lower RRIF fac­tors now start at 3.96 per cent at age 71, ris­ing to 15 per cent at age 94. For ages up to 71, the RRIF fac­tors have also been re­duced by 25 per cent for 2020 and are cal­cu­lated us­ing the for­mula: one di­vided by (90 mi­nus your age on Jan. 1, 2020), which is then re­duced by 25 per cent. The lower min­i­mum with­drawal fac­tors also ap­ply to Life In­come Funds (LIFS) and other locked-in RRIFS. Un­for­tu­nately, if you have al­ready with­drawn more than the lower min­i­mum amount in 2020, you will not be per­mit­ted to re-con­trib­ute any ex­cess to your RRIF.

To il­lus­trate how the lower RRIF fac­tor works, let’s say Jack turned 71 in 2019 and on Jan. 1, 2020, the fair mar­ket value of Jack’s RRIF was $100,000. Us­ing the reg­u­lar min­i­mum amount rates, he would have been re­quired to with­draw at least $5,280 in 2020. Us­ing the new, lower min­i­mum amount rates for 2020, Jack will now only be re­quired to with­draw $3,960 and can ef­fec­tively leave $1,320 more in a tax-shel­tered en­vi­ron­ment. Jack is still free to with­draw more than $3,960, but he is not re­quired to do so.

Jack pre­vi­ously in­structed his RRIF car­rier to dis­trib­ute the min­i­mum amount to him through equal pay­ments on the 15th of each month in 2020. For each of Jan­uary, Fe­bru­ary and March, Jack has re­ceived $440 ($5,280 di­vided by 12), for a to­tal of $1,320. If he de­cides to with­draw only the lower min­i­mum amount of $3,960 in 2020, he could in­struct his car­rier to re­duce his monthly pay­ments to $293.33 (cal­cu­lated as ($3,960 mi­nus $1,320) di­vided by nine) for the re­main­ing nine months of 2020, start­ing in April 2020. Jack can also choose to re­ceive higher pay­ments from his RRIF, per­haps to cover his ex­penses. Al­ter­na­tively, if Jack doesn’t need the funds, it may be sim­pler for him to sim­ply stop his monthly RRIF with­drawals im­me­di­ately, mak­ing sure he takes out the bal­ance of the re­duced min­i­mum by the end of 2020.

WITH­HOLD­ING AT SOURCE

When you with­draw amounts from a RRIF, tax must be with­held by your RRIF car­rier from with­drawals ex­ceed­ing the RRIF min­i­mum amount for the year. The gen­eral rule is that when you re­ceive an­nual pay­ments from a RRIF in ex­cess of the “min­i­mum amount,” the RRIF car­rier must with­hold 10 per cent if the ex­cess pay­ment is up to $5,000, 20 per cent if the ex­cess pay­ment is be­tween $5,000 and $15,000, and 30 per cent if the ex­cess pay­ment is more than $15,000. (Dif­fer­ent rates ap­ply in Que­bec). Note that these rates are only es­ti­mates of taxes ow­ing and, since no tax is with­held at source on the min­i­mum amount, RRIF an­nu­i­tants may end up ow­ing ad­di­tional taxes when they file their per­sonal tax re­turns, de­pend­ing on their mar­ginal tax rates, de­duc­tions and cred­its.

For pur­poses of de­ter­min­ing the tax to be with­held from ex­cess (above the min­i­mum amount) RRIF with­drawals made in 2020, the gov­ern­ment has stated that the reg­u­lar min­i­mum amounts are to be used. To il­lus­trate, let’s as­sume that on Jan­uary 1, 2020, Doris was 71 and had a RRIF worth $100,000.

What if Doris de­cides to with­draw one lump sum pay­ment of $8,000 in 2020? The amount of tax that would be with­held on the with­drawal is $272 (10 per cent of $8,000 - $5,280) since the gov­ern­ment is al­low­ing the reg­u­lar min­i­mum amount to be used for pur­poses of cal­cu­lat­ing the with­hold­ing tax on ex­cess pay­ments.

NON-RES­I­DENT WITH­HOLD­ING TAX ON RRIF WITH­DRAWALS

If you are a non-res­i­dent of Canada, non-res­i­dent tax must gen­er­ally be with­held from your RRIF with­drawals; how­ever, if you are res­i­dent in a coun­try that has a tax treaty with Canada, the amount of non-res­i­dent tax may be re­duced or elim­i­nated. Some treaties ap­ply a re­duced with­hold­ing tax rate for “pe­ri­odic pen­sion pay­ments,” which in­cludes pay­ments from a RRIF where the to­tal an­nual with­drawals do not ex­ceed the greater of twice the min­i­mum amount for the year and 10 per cent of the fair mar­ket value of the prop­erty of the RRIF at the be­gin­ning of the year.

For ex­am­ple, un­der the Canada-u.s. Tax Treaty, the tax rate for non-res­i­dent with­hold­ings is gen­er­ally 25 per cent but a re­duced rate of 15 per cent ap­plies to pe­ri­odic pen­sion pay­ments. For pur­poses of de­ter­min­ing non-res­i­dent with­hold­ing tax in 2020 in these treaty cases, the gov­ern­ment has in­di­cated that the higher reg­u­lar min­i­mum amounts are to be used.

AC­TION RE­QUIRED

With the lower RRIF min­i­mum amounts in ef­fect for 2020, you now have more flex­i­bil­ity in manag­ing your re­tire­ment sav­ings since you can leave more of your funds in a tax-shel­tered en­vi­ron­ment in 2020, if that best suits your per­sonal cash flow needs for the year. Be sure to check with your RRIF provider to see how you may be able to take ad­van­tage of the lower re­quired min­i­mum for 2020.

MIN­I­MUM WITH­DRAWAL AMOUNT RE­DUCED BY 25%

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