A Break for Retirees who can afford it…
Like many Canadians you probably saved for years by contributing to your RRSP and pension plan. You now find that at age 72 you are required to receive your RRIF or LIF income payments and pay tax on the amounts withdrawn. You may find yourself receiving minimum monthly payments from your retirement account at a time when your investments are down in value, and that hurts!
RRIF withdrawal decrease by 25%
On March 25, 2020, the government passed legislation that lowered the minimum amount that must be withdrawn from a Registered Retirement Income Fund (RRIF) in 2020 by 25%, “in recognition of volatile market conditions and their impact on many seniors’ retirement savings.” For example, if you are normally compelled to receive and report $50,000 per annum as taxable income from your RRIF, this amount can, at your request, be reduced to $37,500. The excess 25% or $12,500 can remain in your investment account, and the tax can be deferred to future years.
The benefit, you will defer to future years about $5,000 of income taxes. Moreover, you will leave $12,500 in your registered investment account rather than take it out at depressed market levels.
Of course, this is only beneficial if you can afford to live on the lesser amount of retirement income or can fund your income needs elsewhere for the balance of the year. One hopes that the markets will rise in the coming months and years. Some won’t see any benefit because they need to draw on the minimum amount or more to live.
More details required
We are waiting for the financial institutions to declare how they intend to administer this new rule. Retirees generally receive payments monthly, quarterly or in lump sums from time to time or at the end of the year. Most will opt to receive 25% less on monthly payments. Some will decide to forgo payments for the rest of the year, and receive the balance in mid-December, when hopefully the market values have risen as COVID-19 becomes just a bad memory. Speak with your financial advisor to consider how the changes can apply to your individual strategy.
Finally, keep in mind that these changes apply only for 2020, so the regular RRIF withdrawal factors will apply again starting in 2021.