Last month, the federal government passed legislation as part of its Covid-19 relief plan that lowered the minimum withdrawal rate from RRIFs in 2020 by 25% “in recognition of volatile market conditions and their impact on many seniors’ retirement savings.” While some have argued that RRIF withdrawals should be suspended altogether for 2020, so far, the only relief officially announced is the 25% reduction.
Advisors can play a key role in helping RRIF clients understand the mechanics of the reduced minimum requirement for 2020 and what action, if any, they need to take if they don’t need the extra 25% to meet current living expenses.
Background
A RRIF annuitant must withdraw at least the required minimum amount annually from their RRIF, starting in the year after it’s set up. The required minimum amount is based on a percentage factor, often referred to as the “RRIF factor,” multiplied by the fair market value of the RRIF assets on Jan. 1 each year. For example, if a client has $100,000 in their RRIF and they were 71 at the beginning of the year, they must normally withdraw $5,280 (5.28% times $100,000) in the year. The RRIF factor increases each year until age 95, when the percentage is capped at 20%.
On March 25, 2020, the government passed legislation that decreases the required minimum withdrawals from RRIFs by 25% for 2020. The lower RRIF factors now start at 3.96% at age 71, rising to 15% at age 94. For ages up to 71, the RRIF factors have also been reduced by 25% for 2020 and are calculated using the following formula: one divided by (90 minus your age on Jan. 1, 2020), which is then reduced by 25%. The lower minimum withdrawal factors also apply to life income funds (LIFs) and other locked-in RRIFs. Unfortunately, if your client has already withdrawn more than the lower minimum amount in 2020, they’re not permitted to re-contribute any excess to their RRIF.
To illustrate how the lower RRIF factor works, let’s say Jack turned 71 in 2019 and on Jan. 1, 2020, the fair market value of Jack’s RRIF was $100,000. Using the regular minimum withdrawal rates, he would have been required to withdraw at least $5,280 in 2020. Using the new, lower minimum withdrawal rates for 2020, Jack will now only be required to withdraw $3,960 and can effectively leave $1,320 more in a tax-sheltered environment. Jack is still free to withdraw more than $3,960, but he is not required to do so.
Jack previously instructed his RRIF carrier to distribute the minimum amount to him through equal payments on the 15th of each month in 2020. In each of the first three months of the year, Jack has received $440 ($5,280 divided by 12), for a total of $1,320. If he decides to withdraw only the lower minimum amount of $3,960 in 2020, he could instruct his carrier to reduce his monthly payments to $293.33 (calculated as [$3,960 minus $1,320] divided by nine) for the remaining nine months of 2020, starting in April 2020. Jack can also choose to receive higher payments from his RRIF, perhaps to cover his expenses. Alternatively, if Jack doesn’t need the funds, it may be simpler for him to simply stop his monthly RRIF withdrawals immediately, making sure he takes out the balance of the reduced minimum by the end of 2020.
Action required
With lower minimum RRIF withdrawal rates in effect for 2020, clients now have more flexibility in managing their retirement savings and cash flow since they can leave more of their funds in a tax-sheltered environment in 2020.
Now is a great time to reach out, proactively, to each of your RRIF clients to see what their RRIF cash-flow requirements will be for the rest of 2020. If they are on a regular RRIF withdrawal schedule, connect with the RRIF issuer to see how they are handling the new 25% reduction in minimum withdrawals for 2020.