The Government of Canada, as part of the Covid-19 Economic Response Plan, enacted changes to the calculation of registered retirement income fund (RRIF) withdrawals by reducing the annual minimum amount by 25% for 2020. The measure is aimed at protecting seniors’ retirement savings by reducing the amount they must withdraw at a time when equity markets have seen material declines, and short-term volatility remains high.
Reasons why you may want to reduce your RRIF withdrawal
- To reduce your tax liability for the year. Withdrawals from a RRIF are fully taxable. By reducing the withdrawal amount, you may have less taxable income and pay less tax for the year.
- To avoid social benefit repayments (e.g., OAS). Many social benefits are income-tested, requiring a partial or full repayment if your income exceeds a threshold amount. A reduced withdrawal means less taxable income which may lower the potential for social benefit repayment.
- To maintain tax-deferred growth. Investments held within a RRIF are not taxable but are fully taxable once withdrawn. By delaying withdrawals, the potential for tax-deferred growth increases.
- To extend the life of your RRIF. The less an annuitant withdraws from a RRIF in a single year, the more that will likely be available for future withdrawals.
Do you qualify for the reduced minimum?
If you have already made RRIF withdrawals at or in excess of the unreduced minimum, you will not qualify for the new minimum. Furthermore, if your minimum payment for 2020 has already exceeded the reduced minimum, you will not be permitted to re-contribute the difference to your RRIFs nor can you cancel a withdrawal that has already been made.
Table 1 outlines the three possible situations where an individual would be eligible for the reduced minimum withdrawal.
How might the new minimum work in practice?
Assume you had selected to receive monthly RRIF payments from your plan. At the beginning of the year you are 75 years old; the value of your RRIF was $200,000. Before the new measures your minimum withdrawal amount for 2020 was $11,640 and to-date you have received four monthly payments of $970. However, you have elected to have your remaining RRIF payments adjusted so that your minimum withdrawal for the year is reduced by 25%. With the new measures your reduced annual minimum is $8,730 and your new monthly minimum for the next eight months is $606.25, calculated as: $8,730 – (($970 x 4) / 8)
Is there anything else I should know?
- These changes only apply to 2020
- These changes also apply to Life Income Funds (LIFs)
- Individuals cannot request a partially reduced minimum (e.g. 10% or 20%). If elected, the minimum must be 25%.
- There will be no withholding tax on any withdrawal amounts up to the unreduced minimum amount for 2020
A RRIF is an agreement between an individual and a carrier (insurance company, trust company, or a bank) to provide the individual (annuitant) with retirement income. The annuitant transfers property, such as an RRSP, PRPP, or RRIF, to the carrier in exchange for cash payments. The transfer must be made by December 31st of the year that the annuitant turns 71. A transfer can occur any time prior, and a formula is used to determine the minimum amount.
The Income Tax Act requires that an annuitant receive a minimum amount each year after the RRIF is established. Practically, the minimum amount is based on the value of the RRIF at the beginning of the year, multiplied by an age-related factor (see Table 2). Carriers will use the annuitant’s age to calculate annual minimums. However, an annuitant may make an irrevocable election to have the minimum amount based on their spouse or common-law partner’s age, which is beneficial where there is an age difference. No minimum is required in the first year.
Earnings within a RRIF are tax-free, but withdrawals are fully taxable. Minimum withdrawals are not subject to withholding tax, but excess amounts over the minimum are.
Need more information?
If you would like more information about whether you qualify for a reduction in your RRIF minimum withdrawal for 2020 and whether it could make sense for you, please contact us today.