TANNIS DAWSON

HIGH NET WORTH PLANNER, TD WEALTH

In the wake of the COVID-19 pandemic, the government has lowered the annual minimum mandatory RRIF withdrawal required 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 will only have to withdraw 3.96% of that value. In the chart below, you can see the different percentages that apply at different ages.

Put another way, if your mandatory withdrawal for this year was $10,000, you would only be required to withdraw $7,500.

Some facts worth remembering:

  • The minimum withdrawal has been lowered but you can withdraw more than the minimum if you want.
  • 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 The government has announced that individuals who have already withdrawn more than the newly reduced minimum will not be permitted to recontribute the excess to their RRIFs.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 consult with their financial professionals to see whether it makes sense to withdraw the new lower minimum in this time period, whether they have other streams of retirement income available, and which will be most tax-efficient to draw from.

How has the COVID-19 pandemic affected my RRIF?

First, let’s recall that a RRIF is a registered plan where funds can grow tax-free until you withdraw them. RRIFs themselves will not be impacted by the markets but there’s 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 investments: cash, GICs, mutual funds, ETFs, stocks and bonds.

How seriously your RRIF holdings may have suffered may depend on what kind of investments you have. While many people have seen the value of their investments within a RRIF decline and the outlook for the economy may look grim, some economists are predicting the market downturn could be short and already the stock market is off the lows it hit in March. 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, we 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 funds. But people shouldn’t panic and make unwise moves. Humans naturally are provoked into action when bad news hits but if that action is not well-thought out or focused, it could make it worse. And by that, I mean selling out of your investments from your RRIF at the bottom of the market with no thought to the consequences. As well, it’s been proven that we feel losses more keenly than gains so it’s important to put recent events into perspective and remember the long string of positive years on the market.

If you are frustrated and want to do something to help your investments, remember you presumably have already done something: made a smart investment plan for your RRIF that can sustain growth over a long time period. Jumping out of your investments right now thinking you can jump back in again when the markets turn around has been proven to be a poor way to invest: Not only would someone make paper losses real and irretrievable at the bottom of the market, they would likely miss the best opportunities for growth.

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

A RRIF is just the investment component of a financial plan for retirement which allows investments to grow tax-free until they are withdrawn. A well-rounded financial plan will also deal with expenses, taxes, 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) or 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.

A good financial plan in retirement takes into consideration your goals in life but also helps foresee what we should save for down the line, such as increased healthcare costs as we age or become incapacitated.

Part of a financial plan would be to determine the investments within your RRIF so that they fit your personal character. The plan will help determine what kind of investments you need to keep your funds growing but also what kind of investments you need to generate income for your expenses.

If you don’t have a plan or are unsure you are utilizing your RRIF in the best way possible, now can be the time to think about it

Where can I get more information?

Talking to a financial professional is a good first step. They can help suggest a plan for your goals and help take some of the uncertainty out of finances during this time.

Tannis Dawson has been a chartered accountant (CPA, CA) for 26 years. In the winter, you'll find her skiing or snowmobiling while in summer she enjoys spending time in her garden or on her farm.