The past few months have been an almost perfect storm of bad financial news for Canadian retirees. The historic stock market downturn which occurred in mid-March resulted in a significant loss of value for many retirement savings portfolios, whether those savings were held in registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs). That downturn was accompanied by three consecutive interest rate cuts by the Bank of Canada, meaning that rates of return on such safe investment vehicles as guaranteed investment certificates, which were already low, became negligible.
While the stock market has made a significant recovery from the lows recorded during the month of March, it is not yet at pre-downturn levels. And, while retirees who are under the age of 71 and whose retirement savings are still held in an RRSP may be able to wait out the ongoing downturn in anticipation and hope of a full market recovery, those Canadians over age 71 who hold their retirement savings in a RRIF have a more immediate problem.
That problem arises from the application of the tax rules governing required withdrawals from a RRIF. The basic rule is that every Canadian who has an RRSP must collapse that RRSP by the end of the year in which they turn 71. While there are a few options available to those individuals, most taxpayers choose to convert their RRSP into a RRIF and, by doing so, they can continue to hold the same investments within the plan. There is, however, one big difference between an RRSP and a RRIF and that is that every RRIF holder must withdraw a percentage of the balance within the RRIF by the end of each calendar year. The specific percentage is based on the age of the RRIF holder and is calculated using the value of the RRIF on January 1 of the year.
For nearly every RRIF holder in Canada, the value of their RRIF at the beginning of this calendar year was greater than it is now. Having to make their required withdrawal based on the January 1 balance would mean, in many cases, having to sell investments at loss. In addition, making the usual required withdrawal from a smaller RRIF balance would negatively impact the amount left needed to generate investment gains (and needed retirement income) in future years.
Recognizing the present and future financial cost this poses to retirees, the federal government announced, on March 18, a one-time change in the usual RRIF withdrawal rules for 2020. Basically, that change will allow RRIF holders who had not yet made their full required RRIF withdrawal for 2020 to reduce the amount of that required withdrawal by 25%. The change applies to all types of RRIFs, including Life Income Funds and other locked-in RRIFs.
Take, for example, a retiree whose RRIF has a balance of $500,000 and who would usually be required to withdraw 2% of that balance. Under normal rules that required withdrawal would be $10,000 (2% of $500,000). Following the change announced by the federal government that required withdrawal can be reduced by 25%, meaning that the minimum withdrawal for 2020 is now $7,500 ($10,000 minus 25%).
While the basic rule is straightforward, there are a few aspects of the change which require a more detailed explanation.
- There is no requirement that the amount of RRIF withdrawal for 2020 be reduced. A required RRIF withdrawal amount always represents the minimum withdrawal which must be made, and the RRIF holder is free to withdraw any amount at or above that minimum (while remembering that all RRIF withdrawals create taxable income in the year the withdrawal is made).
- RRIF holders who made more than their reduced minimum withdrawal for 2020 before the change was made cannot re-contribute any “excess”. Continuing the above example, if the RRIF holder had withdrawn $10,000 from his or her RRIF in January of 2020 he or she cannot recontribute the “excess” of $2,500. The planholder’s RRIF withdrawal for 2020 will be $10,000 and he or she will be taxed on that amount.
Many retired Canadians choose to receive required withdrawals from their RRIFs as monthly payments. Where that is the case, the taxpayer can simply opt to reduce monthly payments for the rest of 2020 to arrive at the 25% reduction, as outlined in the following example provided on the Canada Revenue Agency (CRA) website.
“The 25% reduction applies to the entire minimum amount for 2020. For instance, let’s say an individual’s 2020 RRIF minimum amount before the reduction is $12,000. If the individual received minimum amount payments on a monthly basis, they would receive $1,000 per month. Because of the economic measure, their 2020 minimum amount is reduced by 25% to $9,000 ($12,000 × 75% = $9,000). If the individual had already received $1,000 from January to April for a total of $4,000, they would only need to receive a total of $5,000 for the rest of the year to reach their new minimum amount. This means their monthly RRIF payments are reduced to $625 for the remaining 8 months (8 × $625 = $5,000).”
Variable benefits are payments made to plan members from a defined contribution pension plan or a pooled registered pension plan, in a manner similar to a RRIF. The announced change also applies to the minimum amount for individuals receiving variable benefit payments under such plans (i.e., both types of payments are also reduced by 25% for 2020 only).
More information on the federal government announcement, in the form of an FAQ document, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-retirement-savings-plans-registered-retirement-income-funds-rrsps-rrifs/economic-statement-measure-annuitants-rrsp-rrif.html.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.