Why go this route? The main reason is to reduce taxes payable for the year, keeping in mind RRIF payments are fully taxable income. RRIF income may impact OAS benefit repayments: a client near the OAS threshold for repayment may end up under that threshold if the election is chosen.
Apart from tax and OAS considerations, there may be valid investment reasons. If the RRIF holder is heavily invested in equities and underwater after market declines, Ardrey says the reduced minimums may give the portfolio a chance to recover, and on a tax-deferred basis.
What if, after making the election, you realize you need to take more money from your RRIF? RRIF withdrawals are always taxable, but those taxes don’t have to be withheld at source: minimum payments can be made without tax withholding, while payments above the minimum are subject to withholding tax on the excess amount. However, Ardrey notes, Ottawa has said no withholding taxes will be applied until the unreduced minimum amount is reached, which in Dave’s case means withholding taxes will only be applied on amounts above $5,400. In short, if you do not need all your RRIF income for 2020, Ardrey suggests you consider taking advantage of this one-time reduction in RRIF payments.
Aaron Hector, vice-president of Calgary-based Doherty Bryant Financial Strategists, says that for those already taking out more than their required RRIF minimum payment each year, “this entire policy should be a non-issue. This is only relevant for those who have been taking out only their minimum RRIF payments each year.”
Hector says taking advantage of the 25% withdrawal reduction doesn’t necessarily mean a retiree has to spend less money, assuming they have access to savings in TFSAs or non-registered accounts. He cites someone who previously planned to withdraw $10,000 this year from their RRIF but now needs only to take out $7,500. If they take it as a single annual payment in December, it’s simple: withdraw that amount at that time. If they take their money in four quarterly payments, things are more complicated, assuming $2,500 withdrawals were already made in January and April. In that case, they’d make just two remaining payments of $1,250 in each of July and October.
For monthly RRIF payments, on the original $10,000 schedule of $833.33 a month, assume four payments were made from January to April, for a total already paid out of $3,333.33. That leaves $4,166.66 left from May to December to get to the new $7,500 total. In that case, for the last eight months of 2020, you’d take out $520.83 each of those months (a reduction of $312.50 a month going forward). If you’re short on cash for spending, withdraw from TFSAs or non-registered accounts to keep cash flow neutral.
Who is in the best position to accept these reduced RRIF withdrawals? Hector says it’s those with the flexibility to fund their lifestyles from other sources, those in high marginal tax brackets, and those exposed to income-tested benefits like OAS and GIS. In short, “anyone who wants to defer tax into the future could look to take advantage of the reduction.”
And who should not take the RRIF reduction? Those currently taking out more than their minimum payment, or who rely exclusively on their “current” minimum RRIF payments to fund their lifestyle, and those who do not have enough taxable income to fully utilize their tax credits. Hector suggests looking at your tax records for the past couple of years: “If you never have any Federal or Provincial tax payable, then you don’t need to reduce your RRIF withdrawals for tax reasons.”