We regularly encourage our clients to save for retirement by contributing to RRSPs. As clients approach retirement, we meet with them to discuss how to turn those RRSPs into a steady flow of retirement income. The most logical choice for many is the RRIF.
But the RRIF rules, as they currently stand, are outdated and haven’t kept up with recent demographic and economic trends. The rules are the subject of a new report by the C.D. Howe Institute, as well as an ongoing study by the federal Department of Finance.
With a RRIF, clients can keep the same investments they had in their RRSPs and continue to enjoy the tax deferral on the funds, with the exception that they must withdraw at least a required minimum amount annually, starting in the year after they set up the RRIF.
It’s this forced annual minimum withdrawal that has caused concern for some retirees, as it effectively forces them to pay tax on their retirement assets before they need to spend them. Given increases in longevity in recent years combined with low real rates of return on fixed-income investments, perhaps it’s time for the required minimum amounts to once again be revisited.
The required minimum amount is based on a percentage factor, often referred to as the “RRIF factor,” multiplied by the fair market value of RRIF assets on Jan. 1 each year. For example, if a client converted their RRSP to a RRIF last year (i.e., in 2022) when they turned 71, and the balance of their RRIF was $100,000 on January 1, 2023, then this year they must withdraw 5.28% or $5,280. The RRIF factor increases each year until age 95, when the percentage is capped at 20% annually thereafter.
A new report entitled “Live Long and Prosper? Mandatory RRIF Drawdowns Raise the Risk of Outliving Tax-Deferred Saving” from the C.D. Howe Institute calls for a “revamping” of the RRIF withdrawal rules. Co-authors William B.P. Robson and Alexandre Laurin state that longer lives and lower returns increase the likelihood that current mandatory minimum withdrawals “will leave seniors with negligible income from their tax-deferred saving in their later years.”
They believe that “government impatience” to collect tax revenue on RRIF withdrawals should not force RRIF holders to deplete their nest eggs prematurely. Instead, we should ensure that minimum withdrawals and the ages at which we are no longer allowed to save in an RRSP and consequently begin drawing down those retirement savings should be adjusted to reflect updated demographic and economic realities.
The authors go so far as to suggest abolishing age limits for retirement savings altogether, along with eliminating the need for annual minimum withdrawals. After all, the government will eventually collect its deferred tax revenue when the funds are withdrawn, or upon death of the planholder (or their spouse or partner), when the entire fair market value of the RRIF must be taken into income.
If the government is unwilling to abolish RRIF minimums altogether, another withdrawal-reform option recommended by the authors is eliminating the requirement to withdraw amounts below a certain threshold value — say, $8,500 — to avoid premature depletion of nest eggs.
There is precedent for lowering the RRIF withdrawal factors. Advisors may recall that the entire table of RRIF factors was revamped in 2015, with the starting factor lowered by approximately 25% at age 71, before gradually converging with the old factors. In addition, in 2020 the government temporarily decreased the required minimum withdrawals from RRIFs by 25% for the 2020 calendar year as part of its Covid-19 response plan.
We may find out as soon as June 2023 whether the RRIF rules will be reformed as the Department of Finance wraps up its RRIF study. The study was in response to a private member’s motion in the House of Commons last year, which recognized that many seniors are worried about their retirement savings running out and asked the government to undertake a study “examining population aging, longevity, interest rates and registered retirement income funds.”
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.