The budget proposal to reduce minimum RRIF withdrawals is now effective as of June 2015. The changes apply for ages 71 to 94 (Ages under 71 and over 95 will see no changes).
So, What are Registered Investments Exactly?
They include Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Registered Education Savings Plans (RESPs), Locked in Retirement Accounts (LIRAs), Locked in Income Funds (LIFs), Tax Free Savings Accounts (TFSAs), Registered Annuities and Pensions.
The reason they’re called registered is so the government can track them (with the help of your financial institution). They need to know several things, for example; the time you will start paying taxes on them (except TFSAs) and how much. They also need to see that the rules are being obeyed.
Back to RRIFs
At age 71 you can no longer continue holding a Registered Retirement Savings Plan (RRSP). It must be collapsed by December 31st in the year that you turn 71. The options are:-
1) Take out all or part of the funds from the RRSP. When you do this, any amount withdrawn will be added to your income in the year you make the withdrawal. Taking out all the funds can create a large tax burden.
2) Invest all or part of the funds in a Registered Annuity. Buying an annuity guarantees you a certain income for the remainder of your life. Presently, the interest rates used to calculate your yearly income are very low. Before you buy an annuity, ensure that the income you will receive is adequate for your lifestyle costs. Annuities are not indexed unless you purchase that option.
3) Convert all or part of the funds into a RRIF. This generally is the better option. You will be obligated to withdraw a minimum yearly amount and of course, you can withdraw any amount above the minimum you wish. It offers you more flexibility than an annuity and is less of a tax burden than full withdrawal of your RRSP.
When a RRIF is set up, a minimum withdrawal must be made annually beginning no later than the year in which age 72 is reached. These new, reduced minimum amounts will allow plan holders to preserve more of their tax deferred growth than before.
The following table compares the previous and new minimum RRIF withdrawal percentages.
Existing and New RRIF Withdrawal Factors
Source: Department of Finance Economic Action Plan 20
These new RRIF factors will apply for the 2015 and subsequent taxation years. For individuals who have already withdrawn more than the proposed reduced 2015 minimum amount, they will be permitted to re-contribute the excess amount to their RRIF’s. Re-contributions will be allowed until February 29, 2016 and will be deductible for the 2015 taxation year.
Of course, it will still be possible to convert RRSPs to RRIFs before age 71. The withdrawal factor is calculated as 1/(90-age). For example at age 67 you can withdraw 1/(90-67) = 0.43 or 4.3%.
It will also still be allowable to base the minimum RRIF withdrawals on the age of a younger spouse or common law partner. For example a 71 year old man with a 58 year old spouse need only take 1/(90-58) = 0.031 or 3.1%.
As always, consult with your Financial Planner for your best option