Should retirees reduce RRIF payments during COVID-19?

Normally, seniors must convert their RRSPs to a RRIF or a registered annuity before the end of the calendar year they turn 71. Then they must start withdrawing a certain mandated annual percentage of the value of the RRIF each year, starting the year after it was set up. In recent years, the required withdrawals began at 5.28% at age 71, rising steadily until it hits 20% at age 95.

These withdrawals are fully taxable, and there have been concerns this may deplete capital faster than can be replenished by the minuscule returns on fixed income.

On March 25, 2020, soon after the Coronavirus panic became apparent, the federal government’s COVID-19 Economic Response Plan gave RRIF owners the option of taking 25% less than the mandated annual minimums in 2020. (This also applies to Life Income Funds and locked-in RRIFs.)

So, for example, if the previous schedule meant you had to withdraw $10,000 in 2020, it’s now permissible to withdraw only $7,500, leaving the other $2,500 to compound longer, and tax-deferred, inside the RRIF.

Adrian Mastracci, portfolio manager for Vancouver-based Lycos Asset Management Inc., likes this measure. “By providing the flexibility to withdraw 25% less than the minimum withdrawal, seniors can benefit from more planning options if they don’t really need the full RRIF payment this year.” He notes that only a reduction to 75% is allowed (not 10%, not 15%). “The taxpayer must elect this provision with the RRIF trustee. It is applicable to both spouses/partners.”

Matthew Ardrey, vice president and wealth advisor with Toronto-based Tridelta Financial, cites the hypothetical example of Dave, who has $100,000 in his RRIF on Jan 1., 2020, and turns 72 later in 2020. Normally, his 5.4% minimum withdrawal would be $5,400, but with the change in legislation, he can choose to take out just 4.05%, or $4,050. He can also choose to take more than the minimum if he wants.

What are Dave’s options? It depends on what he has already received this year in RRIF payments. He’s out of luck if he already pulled $5,400 from his RRIF as a lump sum. As Ardrey says, “He took his minimum and you can’t put the genie back into the bottle.”

If he hasn’t yet acted, he can choose a minimum payment amount of either $5,400 or $4,050 but can’t choose anything in between (but he can still withdraw any amount over the chosen minimum that he wants). Ardrey adds the caution that once Dave makes the election he can’t go back.

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.”

 Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence  Day and co-author of Victory Lap Retirement. He can be reached at [email protected]

MORE FROM RETIRED MONEY:

• Should you delay your retirement because of COVID-19?
• Reconsidering when to take CPP benefits amid COVID-19 risk
• When is the best time to start taking your CPP payments?
• Is early retirement a realistic goal for most people?