Why this move is so important for affected seniors
On March 30, 2020, the government provided details of the reduction in minimum withdrawals from registered retirement income funds (RRIFs), defined contribution registered pension plans (DC-RPP) and pooled registered pension plans (PRPP).
While all of us are feeling economic stress from this pandemic, things could be particularly problematic for seniors’ saving and spending. Before going into the key measures announced, it’s worth outlining what makes seniors so vulnerable.
General operation of RRIFs
Accumulated savings in a registered retirement savings plan (RRSP) may be taken as a lump sum, used to purchase an annuity that pays a fixed annual amount, or continue to grow tax-sheltered in a RRIF. While this may occur at earlier ages, a RRSP must be matured by the end of the year the annuitant turns 71.
Once in a RRIF, the annuitant/owner is required to take a minimum percentage into taxable income each year. At age 71, the minimum is 5.28%, rising each year until it reaches 20% at age 95 and thereafter.
For RRIFs opened before age 71, it is calculated as: 1 divided by [90 minus age]
Vulnerability of seniors’ savings
Implicitly, the reduction in RRIF minimums is an acknowledgement of the special kind of economic stress many seniors may experience during and following this pandemic. Some of the effects:
- Despite a senior making efforts to live more frugally or draw from other non/less-taxable reserves, mandatory minimums force RRIF depletion beyond what may be necessary to live on.
- Funds coming out of a RRIF can’t go back in. That’s a permanent loss of this tax sheltering room.
- Seniors who are no longer working will have little or no new income as a source for replenishing depleted retirement savings after this episode, unlike those who are able to continue to work.
- Though the timing is uncertain, an investment market recovery will be expected following this downturn. As a function of age, seniors will have less time to participate in such a recovery.
- As tax will have applied to RRIF minimums, less net funds will be available to invest in any recovery.
Key measures for RRIF annuitants
The points below are highlighted by the government in the announcement. To reduce the wordiness, only the term RRIF is used here, though again the changes apply similarly to DC-RPPs and PRPPs:
- The minimum amount that must be withdrawn from RRIFs for the 2020 year is reduced by 25%. For example, the 5.28% minimum at age 71 will be reduced to 3.96%, and at 95 it will be reduced to 15%
- This measure applies for the 2020 taxation year only, not for future years.
- For an individual who has already withdrawn more than the reduced 2020 minimum, he/she will not be able to re-contribute to RRIF to bring the withdrawal down to the reduced minimum.
- The reduced minimum also applies to life income funds and locked-in RRIFs. Such plans have both minimum and maximum withdrawal limits. To be clear, the changes apply to reduce the minimum withdrawal factor, but have no effect on the maximum withdrawal factor.
- As a general rule, withholding tax is not applied to minimum RRIF withdrawals. The withholding tax rule is unaffected by this special reduction in the 2020 minimum, meaning that withholding tax will continue to apply only to amounts above the unreduced minimum for the year.