COVID-19 and the impact on RRIFs

The year Canadians turn 71, they usually need to convert their Registered Retirement Savings PlanRegistered Retirement Savings Plan A plan that lets you save for retirement while lowering your income taxes. You choose how you want to invest your savings. You don’t pay tax on any money in your account until you take it out.+ read full definition (RRSPRRSP See Registered Retirement Savings Plan.+ read full definition) to a Registered Retirement Income FundRegistered Retirement Income Fund A plan that holds your retirement savings and provides income after you retire. It works like an RRSP in reverse because you withdraw money instead of saving. There are rules about how much you can withdraw each year.+ read full definition (RRIFRRIF See Registered Retirement Income Fund.+ read full definition). These are accounts that are designed to help provide Canadians with a retirement income stream from their RRSPs. These accounts are registered with the Government of Canada.

Once they convert their RRSPs to a RRIF, Canadian seniors need to withdraw an annual amount which usually starts at 5.28% at 71 years to up to 20% at 95 years of age.

That has been the practice for decades but with the COVID-19 pandemic, the federal government reduced the withdrawal for all types of RRIFs by 25% for the 2020 year. So if you have to withdraw $15,000 for the 2020 year, you would normally take out $1,250 per month ($15,000 ÷ 12). With the 25% reduction, the total amount would be reduced to $11,250 ($15,000 x 0.75) or $937.50 per month.

You can use our RRIF withdrawal calculator to estimate withdrawals from your plan in retirement.

The government announced the new guidelines to give seniors more flexibility. They can withdraw what they need for the year which can help them manage their taxes on said withdrawals.

Here’s what to keep in mind if you plan on withdrawing 25% less of your annual minimum:

If you’ve taken out a portion of your yearly amount from your RRIF before the announcement, you can withdraw an additional amount that results in the total withdrawn being 25% less than the required normal withdrawal.

As this reduction was announced in March 2020, anyone who has withdrawn more than their reduced 2020 minimum amount cannot recontribute the difference back to their RRIF.

RRIF withdrawals are taxable as income and that will remain. Withholding taxWithholding tax Tax that comes off your pay or other income and goes to the government before you get any money.+ read full definition will also still apply if you take out more than your original unreduced minimum amount.

Should you reduce your 2020 withdrawal?

It depends on your individual economic and taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition situation. For example, you may need to withdraw the full amount for necessary expenses. If not, reducing your withdrawal can be used to potentially avoid selling investments at a loss. However, you’re not required to sell your investments to meet the minimum withdrawal amount. If selling would lead to a loss on your investments, you can do what’s known as an ‘in-kind’ withdrawal. This is when you transfer investments from your RRIF to a TFSATFSA See Tax-Free Savings Account.+ read full definition (if there is available room) or to a non-registered account. These accounts need to be in your name for this transfer. The withdrawn amounts will still be taxed as income, but this may protect the value of your investments by buying you time through the market volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition of the COVID-19 pandemic.

These do have tax implications so speak to your financial advisor about the various options to see which one is the best for you.

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