The federal government has proposed a reduction in the minimum withdrawal rules for registered retirement income funds (RRIFs) to permit seniors to preserve more of their retirement savings and help reduce the risk that they will outlive their savings.
The 2015 federal budget, unveiled on Tuesday, proposes to adjust the factors that are used to calculate minimum withdrawal requirements to better reflect more recent long-term historical real rates of return and expected inflation. The existing RRIF factors have been in place since 1992.
"We want older Canadians to enjoy the golden years that are their reward after decades of hard work and diligent saving," said Finance Minister Joe Oliver in his budget speech on Tuesday. "Today, I am pleased to announce that we will give seniors more choice when it comes to managing their retirement income, by reducing the minimum withdrawal requirements for registered retirement income funds."
The formula used to calculate the minimum withdrawal requirements is based on a particular rate of return and indexing assumption. The budget proposes to adjust those assumptions to a 5% nominal rate of return on RRIF assets, down from 7% currently, and annual inflation of 2%, up from 1% currently. The changes would apply in respect of ages 71 to 94.
Under the changes, a senior would be required to withdraw 5.28% of his or her RRIF at age 71, down from 7.38% today. At age 94, a senior would be required to withdraw 18.79%, down from 20% currently. At age 95 and above, the percentage that seniors are required to withdraw annually would remain capped at 20%.
There will be no change to the minimum withdrawal factors that apply in respect of ages 70 and under, which will continue to be determined by the formula 1/(90 – age).
The new RRIF factors will permit close to 50% more capital to be preserved to age 90 compared with the existing factors, according to the budget document.
For example, an individual with a $100,000 RRIF at age 71 will have preserved $44,000 by age 90 under the proposed new rules, assuming he or she made minimum withdrawals every year. Under the existing rules, that individual would have preserved $30,000.
By reducing RRIF withdrawals, the budget document says, seniors will be able to retain more assets in their RRIFs, which will continue to accumulate on a tax-deferred basis to support their future retirement income needs, should they live to an advanced age.
Various industry groups and think tanks — including the Conference for Advanced Life Underwriting and the C.D. Howe Institute — have proposed reductions to the RRIF minimum withdrawal rules in recent years to better reflect life expectancy, rates of return, and inflation rates.
The change is positive for Canadian seniors, says Debbie Pearl-Weinberg, executive director, tax and estate planning, wealth advisory services with Canadian Imperial Bank of Commerce: "This measure will assist seniors who were concerned about outliving their RRIF savings and being forced to take more than they needed to from their RRIF, which negatively impacted their eligibility for both the [guaranteed income supplement] and the [old-age security]."
Meanwhile, Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC) is disappointed that the age wasn't extended out beyond 71 or that the annual withdrawal limits weren't eliminated completely, as the IIAC had recommended. Still, he adds that the government's proposal "is a compromise solution that's quite significant and allows Canadians to save more, so it's a good thing. This is something that retired Canadians have been asking for, for a long time."
The new RRIF factors will apply for the 2015 and subsequent taxation years. To provide flexibility, the budget document says, RRIF holders who withdraw more than the reduced 2015 minimum amount in 2015 will be permitted to re-contribute the excess to their RRIFs until Feb. 29, 2016.
The government estimates that this measure will provide about $670 million in federal tax relief to Canadian seniors between 2015–16 and 2019–20.