New RRIF Planning Opportunities

The recent April 21 Federal Budget introduced relaxed rules for mandatory withdrawals from a RRIF, effective in the 2015 and subsequent tax years.

To read Part 1 of this story, click here.

The factor used to calculate mandatory withdrawals from a RRIF (multiplying it by the value of assets in the RRIF) has been reduced to help Canadians preserve capital throughout retirement, taking into consideration increasing longevity and lower expected rates of return and inflation, based on recent long-term historical data.

Canadians are currently required to withdraw a minimum of 7.38 percent of their RRIF starting at age 71, with the minimum rising each year until it is capped at 20 percent at age 94 and beyond. Under the new rules to take effect for the 2015 tax year, the minimum withdrawal is reduced to 5.28 percent at age 71, increases annually to 18.79 percent at age 94, and will now be capped at 20 percent at age 95 and beyond.

Other rules to note in approaching the subject with pre-retirees include the following:

• Lower and Upper Age Limit Planning - There is no lower age limit for establishing a RRIF, although most RRIFs are created at age 71 or in the few years before that, because of the requirement that taxpayers collapse all RRSPs by the end of the year they turn 71.
• Income Reporting, Year of RRIF Establishment - In the year that the RRIF is established (by transferring of funds from another registered plan), there is no minimum withdrawal, though taxpayers may choose to withdraw funds if they like. All funds withdrawn are taxable in the year withdrawn.
• Income Reporting, Subsequent Years - In subsequent years, S. 146.3(2)(e.1) and 146.3(2)(e.2) provide the rules for the minimum amount that must be withdrawn from the RRIF each year. Calculate by multiplying the fair market value (FMV) of all assets held within the RRIF at the beginning of the calendar year by a factor that depends on the taxpayer’s age (or if elected, the age of the taxpayer’s spouse or common-law partner)

Example: New RRIF Rules

Danielle turned 65 in 2015.  In order to take advantage of the $2,000 pension income amount in 2015, late in the year she transferred $200,000 from her RRSP to a RRIF.  In 2015 there was no minimum withdrawal so she withdrew $2,000.  Assuming income of 4% annually earned in her RRIF and that she makes only the minimum withdrawals in future years, here's how her RRIF balance and withdrawals will look under the new rules:

To compute the effect of RRIF planning on taxable income, Knowledge Bureau has developed two specific tax calcuators to help:  the Income Tax Estimator and the Tax Efficient Retirement Income Calculator, available at a 15% discount throughout the month of May.

Next time:  The Effect of New RRIF Rules on Pension Income Splitting