In the wake of the COVID-19 pandemic, the government has lowered the annual minimum mandatory RRIF withdrawal amount for the 2020 taxation year by 25%. What does that mean? Based on the chart provided below, a RRIF holder aged 71 would have previously been required to withdraw 5.28% of the January 1 value of their RRIF. Under the new rule, they may only have to withdraw 3.96% of that value for 2020. The exact percentage will vary based on your individual circumstances. In the chart below, you can see the different percentages that apply at different ages.

Put another way, if your mandatory withdrawal for 2020 was $10,000, you would only be required to withdraw $7,500. Since withholding tax will continue to apply only if your RRIF withdrawals during 2020 exceed your original minimum amount, this means that you can choose to withdraw from your RRIF this year any amount between the original minimum amount and the new reduced minimum amount.

Source: Government of Canada

Some facts worth remembering:

  • The minimum withdrawal has been lowered but you can withdraw more than the minimum if you want.
  • Withholding tax will apply only if you withdraw more than the original required minimum amount.
  • The minimum RRIF withdrawal percentage increases incrementally with your age (see chart below).
  • All RRIF withdrawals are considered to be taxable income.

Why did the government lower the minimum withdrawal?

The reason for this reduction is that financial markets have declined during the COVID-19 pandemic. Since those enrolled in RRIFs must withdraw a required percentage every year, they may in fact be forced to sell investments that have declined sharply or have not yet reached their planned potential. Withdrawing less at this time than what is usually mandated brings a certain amount of relief so that more funds can stay in the RRIF and have a chance to rebound.

What if I’ve already made a withdrawal?

It’s possible that some people have already made their annual or partial withdrawals. The government has announced that individuals who have already withdrawn more than the newly reduced minimum will not be permitted to recontribute the excess to their RRIFs. For those who have made partial withdrawals, they may be able to reduce subsequent payments so that total 2020 withdrawals are within the newly reduced minimum amount.

People should be mindful that there is, of course, a practical consideration of withdrawing enough money from your RRIF. Reducing the amount taken from a RRIF may leave you short if you had planned on a certain amount being available each year. People can consult with a financial professional to see whether it makes sense to withdraw the new lower minimum in 2020, what other streams of retirement income may be available, and what will be most tax-efficient.

How has the COVID-19 pandemic affected my RRIF?

First, recall that a RRIF is a registered plan where funds can grow tax-free until you withdraw them. There is a chance the investments held within the RRIF may have seen a decline. As well, everyone’s RRIF holdings are unique, containing different types of  qualified investments, such as cash, guaranteed investment certificates (GICs), mutual funds, exchange-traded funds (ETFs), stocks and bonds.

The impact of market events on your RRIF holdings will depend on the kind of investments you hold. While many people may have seen the value of their investments within a RRIF decline, it can be important to remember that fluctuations are common when investing in the market. That’s all to say that an investment may have declined currently but it may also bounce back in the future. Any losses are not realized until investments are sold. In this way, if you hold a variety of investments within the RRIF, you may have flexibility to choose what investments to use when RRIF withdrawals are made.

Should I make changes to my investments to keep my RRIF safe?

Seeing losses or declines in your statement can certainly cause you concern and may provoke you into making snap decisions about your retirement investments. Humans naturally are provoked into action when bad news hits but, if that action is not well-thought out, it could make it worse. And by that, it could mean selling out of your investments from your RRIF at the bottom of the market. As well, it’s been proven that we feel losses more keenly than gains so it’s important to remember that volatility is normal when investing in the market.

Jumping out of your investments right now thinking you can jump back in again when the markets turn around has historically proven to be a poor investment strategy. Not only would someone potentially crystallize paper losses at the bottom of the market, they could also miss opportunities for growth. If you are concerned about the investments held within your RRIF, you should speak with a financial professional.

What’s the difference between a RRIF and a financial plan?

A RRIF can be viewed as the investment component of a financial plan for retirees which allows them to hold qualified investments tax-free until they are withdrawn. A well-rounded financial plan will also deal with expenses, taxes and estate planning, and should also take into account other sources of income such as a pension, non-registered savings, Old Age Security (OAS), the Canada Pension Plan (CPP), and the income sources from a spouse. It can also answer the basic question of just how much money you need to live on and withdraw from your RRIF. Too much money taken out means you may run out of funds in the long run but not enough may mean you could run into debt during the year.

Where can I get more information?

Talking to a financial professional can be a good first step. You can also find more information at the CRA website.

If you’d like to speak to someone regarding your RRIF at TD, or learn more about RRIFs, you can call 1-888-568-0951 or visit the TD website to view information about RRIFs and investment options.

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MONEYTALK LIFE

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DANESH MOHIUDDIN