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Last updated: November 26 2008
In-kind RRIF Withdrawals
On November 20, the minister of finance sent a letter to financial institutions regarding Registered Retirement Income Funds. The letter states:
Dear ______:
I am writing to seek your cooperation on an important issue for Canadian seniors, withdrawals from Registered Retirement Income Funds. Many seniors are understandably concerned about the impact of the recent deterioration in market conditions on their financial security and I believe it is important to ensure that they do not face undue obstacles in managing their assets in these challenging times.
A common misconception is that seniors must sell assets to satisfy RRIF withdrawal requirements, something many may not want to do at this time given the recent decline in value of many assets. The income tax rules permit "in-kind" asset transfers to meet the minimum withdrawal requirements ñ they do not require the sale of assets.
It has been brought to my attention that, in certain circumstances, there may be obstacles to in-kind asset transfers within financial institutions. It has also been suggested that some financial institutions may not be advising clients of this option where it does exist.
To address this issue, I am expecting all financial institutions to accommodate in-kind transfers ñ at no cost to clients ñ or offer another solution that achieves the same result. I would ask that you ensure that all clients with RRIFs be made aware that this option exists.
I would like to hear from you by Friday, November 28 to confirm that steps have been taken to ensure that in-kind asset transfers between RRIFs and other accounts are possible at no cost to the client and that RRIF clients will be made aware of this option.
Thank you for your cooperation.
Sincerely,
James M. Flaherty
As the letter indicates, in-kind payments from RRIFs are allowed but not common. Most taxpayers and financial institutions assume that the minimum RRIF withdrawals must be made in cash. To accomplish that, retirees with their RRIF investments in bonds or stocks would have to sell those investment instruments in order to have cash available to make those minimum RRIF withdrawals. The minister is asking financial institutions to facilitate in-kind RRIF withdrawals and to inform their RRIF holders that such withdrawals are possible. Although the RRIF annuitant could request that the stock certificates be delivered to them, a more likely scenario is that the financial institution holding the RRIF assets would transfer those assets to a non-registered trading account for the annuitant.
For RRIF annuitants who require that RRIF income to live on, such withdrawals would be of little benefit, but they might allow RRIF annuitants who have other funds available to recover from large decreases they may have experienced this year in their RRIF investments, though not without some income tax consequences. See the example below.
Example: In-kind RRIF Withdrawals
Henry is 85 years old. His RRIF balance at the beginning of 2008 was $200,000, invested in blue chip stocks. His minimum RRIF withdrawals for 2008 are 10% of the beginning balance (rates rounded for clarity). With the melt-down in the markets in the latter half of 2008, his RRIF holdings now have a fair market value of $100,000.
Scenario 1: Henry sells sufficient stocks to generate the required $20,000 cash for withdrawals.
After Henry sells $20,000 worth of stock, his RRIF balance will be $80,000 with no tax relief for the loss in value of his stocks and no means of recovering that lost value, even if the value of the stocks increases in future years. He will pay tax on the $20,000 RRIF withdrawal in 2008. In 2009, his minimum RRIF withdrawal will be reduced to approximately $8,000 (about 10% of the remaining balance). If Henry needs the $20,000 to live on, he can expect that, even if the value of the remaining portfolio increases, more than the minimum withdrawals will likely be required for some time - and likely his RRIF balance will not last for long.
Scenario 2: Henry makes an in-kind withdrawal of stock from his RRIF.
After Henry removes $20,000 worth of stock from his RRIF, the remaining balance will be $80,000. There is no tax relief in 2008 for the loss in value of his stocks, but he now holds $20,000 in stocks outside of his RRIF. Should the stocks regain their value, he can recover those losses. Henry will have to pay tax on the $20,000 RRIF withdrawal in 2008. If the stock that was withdrawn does recover, he will have to pay capital gains tax on the increase in value. In 2009, his minimum RRIF withdrawal will be reduced to approximately $8,000 (about 10% of the remaining balance).
Taxpayers who may have already converted a portion of their RRIF stock portfolio into cash (and thereby locking in the losses) in order to withdraw those funds can still place themselves in the same position as those who have made in-kind withdrawals by repurchasing the liquidated investments in their non-registered portfolios. This, of course, is only possible if the taxpayer does not need the RRIF income for living expenses.
RRIF annuitants who hold their RRIF funds in stocks that have decreased in value but who fully expect that the value of the stocks will recover may find that in-kind withdrawal of RRIF assets may present a planning opportunity. By converting the stocks from RRIF assets (which will be fully taxable when the amounts are withdrawn) to non-registered assets, the increase in value will only be 50% taxable rather than fully taxable. Retirees who have funds available might consider converting the RRIF assets to cash at a low point in their value and then re-purchasing the same investments outside their RRIF allowing the recovered values to be taxed at the capital gains tax rate.
To learn more about retirement planning strategies, see the Retirement Income Specialist program.
