Lower RRIF Withdrawal Minimums—More Flexibility for Seniors

Monday, June 15, 2015

The annual federal budget revealed in April 2015 brought along changes that have a profound impact on the financial industry. Along with the decision to raise the contribution limits of TFSAs, it was also announced that the government has proposed new rules for Registered Retirement Income Funds (RRIF) and lowered the mandatory withdrawal minimum for seniors significantly. In today’s blog post, we will take a quick look at how the new RRIF rules will affect seniors and their retirement savings.

Currently, seniors that have reached 71 years of age are required to withdraw the minimum amount from their RRIF each year. Up until the federal budget of 2015, this amount was 7.38% of an individual’s RRIF. The new changes will decrease the mandatory withdrawal significantly to 5.28%, but will continue to increase at a slightly faster rate per year. However, instead of capping off at 20% by the age of 94, the cap will now be reached at age 95.

Reasons for the Change
Living in Canada has changed dramatically since 1993, the year when the former 7.38% withdrawal rate came into effect. Since then, the average life expectancy in Canada has improved from about 77 years to 81 years by 2012; it is certainly even higher today. The proposed RRIF rules are meant to reflect the change in the Canadian way of life and “reduce the risk of people outliving their savings.

Investment industry groups, including CALU, and seniors’ organizations, such as CARP, have been active over issues regarding an individual’s retirement savings for years. They have often voiced their concerns about eliminating or pushing back the age at which the mandatory withdrawals began. Now, seniors can accumulate their savings longer and have more flexibility when it comes to managing their money in a tax-efficient way.

Useful Tips and Advantages
The new withdrawal minimum in RRIFs allows almost 50% more capital to be preserved by the age of 90. It is estimated by the federal government that the RRIF changes will save seniors $670 million in taxes over the next five years until 2020.

For wealthier Canadians, it is best to remember not to leave too much money inside your RRIF because this will lead to a higher tax liability upon death. While withdrawing a certain amount of money will trigger some taxes, it will correspond with your marginal tax bracket at the time. Therefore, the longer you accumulate your money, the more likely it is for taxes to be triggered in an estate and pushed to a higher tax bracket.

Related Links
New TFSA Limit
https://www.ironshield.ca/articles/new-tfsa-limit-reaches-close-but-not-quite-to-proposed-11000/

Four Mistakes to Avoid When Creating a Retirement Plan
https://www.ironshield.ca/articles/four-mistakes-to-avoid-when-creating-a-retirement-income-plan/

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