In recognition of the volatile market conditions and its impact on many seniors’ retirement savings, it is crucial to review your retirement plan with your advisor. We will start by discussing Registered Retirement Savings Plan (RRSP) conversion options and then share retirement strategies to consider, including taking advantage of the new Registered Retirement Income Fund (RRIF) withdrawal minimums.
RRSP Conversion Options
Before December 31 of the year you turn 71 years old, you must address the conversion of your RRSP. You have three options and all can be used in combination:
- The funds can be de-registered (withdrawn, which may create a large tax burden).
- The funds can be transferred to a RRIF. Mandated minimum withdrawals will begin the year after the RRIF account is established, based on the value of the RRIF at the beginning of the calendar year.
- The funds can be used to purchase a registered annuity. Registered annuities can be purchased using funds held in a RRSP, RRIF, LIRA, or LIF (among other sources) and can provide guaranteed lifetime income. Payments are taxed as income and must start by your 72nd year, unless purchased through an Advanced Life Deferred Annuity discussed below. An annuity is great to establish an income floor for retirees with other sources of variable income.
Minimum RRIF withdrawals are calculated based on your age, as well as the fair market value of the RRIF assets at the beginning of the year. Withdrawals from your RRIF, including the minimum amount, are taxable as income.
New RRIF Minimums
The Federal government announced a 25% reduction on minimum Registered Retirement Income Funds (RRIF) withdrawals for 2020. This gives additional flexibility to Canadian seniors for managing their cash needs through the COVID-19 crisis.
The minimum reduction announced should help make up for the market losses so that retirees aren’t withdrawing an amount based on a market value that is no longer reasonable. This is advantageous for seniors who have the ability to financially sustain their lifestyle through other means and don’t require the previous minimum payment.
By taking a lesser amount this year, retirees are able to leave a larger amount in their RRIF account to rebound and grow with the markets.
However, if a retiree needs an amount greater than the newly defined minimums for their lifestyle, these reduced minimums have very little impact.
Withholding tax will apply only on those amounts in excess of the original RRIF minimum amount.
|Age||Normal Factor||New Reduced Minimum|
|(at start of last year)||(%)||For 2020|
|95 & over||20.00%||15.00%|
Source: Government of Canada
For those who already withdrew the higher RRIF minimum for 2020, the new act doesn’t allow for re-contribution of the difference between the previous and newly defined minimum. To take advantage of the new RRIF withdrawal minimums:
- Review how much income you will need to sustain your retirement lifestyle.
- Assess if you will need more money than the minimum withdrawal amount each year. If you do need greater than the minimum amount, review your other investment accounts as options for potential withdrawal.
- Keep in mind your overall taxable income for the year. Even if the new reduced minimums apply to you, it may be beneficial to take more taxable income if you are currently in a lower income bracket.
- Be sure to review your asset withdrawal strategy. Some investments may be impacted to a greater extent than others by market volatility. If possible, consider withdrawals from investments that have not been impacted as much, such as savings accounts, GICs or bond ladders.
New Option for Retirement Income Planning
In addition to the redefined minimum RRIF amounts, the 2019 Federal Budget proposed to provide Canadians with greater flexibility in managing their retirement savings by permitting a new option for prolonged retirement income in registered plans. Advanced Life Deferred Annuities (ALDA) will be permitted under a RRSP, RRIF, deferred profit sharing plan (DPSP), pooled registered pension plan (PRPP) and defined contribution registered pension plan (RPP).
An ALDA is comparable to the life annuity but its payments can be deferred until the individual reaches 85 years of age. A maximum of 25% of the amount accumulated under a qualifying plan can be applied to purchase an ALDA. There is also a dollar limit of $150,000 (indexed to inflation) from all qualifying plans used to purchase the ALDA.
This is beneficial to retirees going through a market correction because it allows for a substantial value of RRIF assets to become excluded from minimum payment calculations and defers payment on this value until age 85.
“The value of an ALDA will not be included for the purpose of calculating the minimum amount required to be withdrawn in a year from a RRIF, a PRPP member’s account or a defined contribution RPP member’s account, after the year in which the ALDA is purchased”.1
If you have not reviewed your financial plan recently, we can help ensure you’re on track. Our Portfolio Managers work closely with our Wealth Advisory Services to deepen financial strategy discussions. We are currently respecting the physical distancing rules; however, we welcome client meetings via conference call. Please fill out the form below and we will be in touch shortly.