RRIF Withdrawal Strategies After April 2015 Budget

The April 21 Federal Budget adjusted the minimum RRIF withdrawal rates Canadians must apply to their taxable incomes in their retirement years.

Specifically, an RRSP must be “matured” or converted to a retirement income vehicle such as an annuity or RRIF by the end of the year in which the RRSP holder turns 71.  If a RRIF is chosen as the vehicle, a minimum amount must be withdrawn each year after establishing the RRIF. 

Minimum Withdrawals

The minimum withdrawal factors, which have been in place since 1992, are based on a percentage factor multiplied by the value of the assets in the RRIF.  The last time adjustments were made to these withdrawal factors was in 2007, when the age limit for starting taxable pension payments from an RRSP was increased from age 69 to 71.  Under those rules, in effect until 2014, the RRIF holder had to withdraw 7.38% of their RRIF in the first year.  The factor increases gradually each year until age 94 when it is capped at 20% per year. Under the budget proposals, the minimum withdrawal factors will be adjusted to better reflect historical rates of return and the expected inflation rate (5% and 2%).  This withdrawal factor is determined under Reg. 7308. A history of the rules follows.

Note: The rules governing qualifying investments for RRIFs are the same as for RRSPs.

Transfers Between RRIFs and Other Registered Plans

Aside from RRSP accumulations, the following may be transferred to the taxpayer’s RRIF on a tax-free basis:

• Retiring Allowances (under S. 60(j.1))

• Funds from another RRIF (under S. 146(16)(a)): A taxpayer may request a direct transfer of RRIF accumulations from one RRIF to another RRIF under which he is the annuitant.

o Form T2033 Direct Transfer Under Subsection 146.3(14.1) or 146(21), or Paragraph 146(16)(a) or 146.3(2)(e) may be used to effect the transfer.

• Funds from a Spouse’s RRIF (under S. 146(16)(b)): Upon the breakdown of a marriage or common-law relationship, where the terms of a separation or divorce agreement require that the funds from one spouse’s RRIF be transferred to the other, the funds may be transferred tax free.

o Form T2220 Transfer from an RRSP, RRIF, PRPP or SPP to Another RRSP, RRIF, or SPP on Marriage Breakdown must be used to effect the transfer.

• Funds from an RPP (Registered Pension Plan) (under S. 147.3): When a taxpayer ceases to belong to an RPP, he may request the funds from his RPP be transferred to his RRIF.

o Form T2151 Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3 must be used to effect the transfer.

• Funds from a DPSP (Deferred Profit Sharing Plan) (under S. 147(19)(b)(i)).

o Form T2151 Direct Transfer of a Single Amount Under Subsection 147(19) or Section 147.3 must be used to effect the transfer.

No contributions may be made to a RRIF other than transfers from other registered accounts.

RRIF Minimum Withdrawal Rates

Since 2007 (RRSP matures at age 71: 7% nominal rate plus 1% indexation)

Transitional Rule:  For 2015 only RRIF holders can re-contribute withdrawals over the new minimum up to February 29, 2016 and take a deduction for the amount over the minimum.

The result is that seniors can keep their RRIF accumulations sheltered longer and have greater flexibility over the way the money is withdrawn.

Next week we will explore RRIF planning opportunities.