Last month, the government passed legislation that lowered the minimum amount that must be withdrawn from a Registered Retirement Income Fund (RRIF) in 2020 by 25 per cent “in recognition of volatile market conditions and their impact on many seniors’ retirement savings.” While some have argued that RRIF withdrawals should be suspended altogether for 2020, so far, the only relief officially announced is the 25 per cent reduction. Here’s what you need to know.
How does it work?
You must convert your Registered Retirement Savings Plan (RRSP) to either a RRIF or a registered annuity before the end of the year you turn 71. While you may keep the same investments as an RRSP and enjoy continued tax deferral on the funds in an RRIF, you must withdraw at least the required minimum amount annually from your RRIF, starting in the year after you set it up.
The required minimum amount is based on a percentage factor, often referred to as the “RRIF factor,” multiplied by the fair market value of your RRIF assets on Jan. 1 each year. For example, if you have $100,000 in your RRIF and you were 71 at the beginning of the year (i.e. January 1), you must normally withdraw $5,280 (5.28 per cent times $100,000) in the year. The RRIF factor increases each year until age 95, when the percentage is capped at 20 per cent.
On March 25, 2020, the government passed legislation as part of the Government of Canada’s COVID-19 Economic Response Plan that decreases the required minimum withdrawals from RRIFs by 25 per cent for 2020. The lower RRIF factors now start at 3.96 per cent at age 71, rising to 15 per cent at age 94. For ages up to 71, the RRIF factors have also been reduced by 25 per cent for 2020 and are calculated using the formula: 1 divided by (90 minus your age on Jan. 1, 2020), which is then reduced by 25 per cent. The lower minimum withdrawal factors also apply to Life Income Funds (LIFs) and other locked-in RRIFs. Unfortunately, if you have already withdrawn more than the lower minimum amount in 2020, you will not be permitted to re-contribute any excess to your RRIF.
To illustrate how the lower RRIF factor works, let’s say Jack turned 71 in 2019 and on Jan. 1, 2020, the fair market value of Jack’s RRIF was $100,000. Using the regular minimum amount rates, he would have been required to withdraw at least $5,280 in 2020. Using the new, lower minimum amount rates for 2020, Jack will now only be required to withdraw $3,960 and can effectively leave $1,320 more in a tax-sheltered environment. Jack is still free to withdraw more than $3,960, but he is not required to do so.
Jack previously instructed his RRIF carrier to distribute the minimum amount to him through equal payments on the 15th of each month in 2020. For each of January, February and March, Jack has received $440 ($5,280 divided by 12), for a total of $1,320. If he decides to withdraw only the lower minimum amount of $3,960 in 2020, he could instruct his carrier to reduce his monthly payments to $293.33 (calculated as ($3,960 minus $1,320) divided by 9) for the remaining nine months of 2020, starting in April 2020. Jack can also choose to receive higher payments from his RRIF, perhaps to cover his expenses. Alternatively, if Jack doesn’t need the funds, it may be simpler for him to simply stop his monthly RRIF withdrawals immediately, making sure he takes out the balance of the reduced minimum by the end of 2020.
Withholding at source
When you withdraw amounts from a RRIF, tax must be withheld by your RRIF carrier from withdrawals exceeding the RRIF minimum amount for the year. The general rule is that when you receive annual payments from a RRIF in excess of the “minimum amount,” the RRIF carrier must withhold 10 per cent if the excess payment is up to $5,000, 20 per cent if the excess payment is between $5,000 and $15,000, and 30 per cent if the excess payment is more than $15,000. (Different rates apply in Quebec). Note that these rates are only estimates of taxes owing and, since no tax is withheld at source on the minimum amount, RRIF annuitants may end up owing additional taxes when they file their personal tax returns, depending on their marginal tax rates, deductions and credits.
For purposes of determining the tax to be withheld from excess (above the minimum amount) RRIF withdrawals made in 2020, the government has stated that the regular minimum amounts are to be used. To illustrate, let’s assume that on January 1, 2020, Doris was 71 and had a RRIF worth $100,000.
What if Doris decides to withdraw one lump sum payment of $8,000 in 2020? The amount of tax that would be withheld on the withdrawal is $272 (10 per cent of $8,000 – $5,280) since the government is allowing the regular minimum amount to be used for purposes of calculating the withholding tax on excess payments.
Non-resident withholding tax on RRIF withdrawals
If you are a non-resident of Canada, non-resident tax must generally be withheld from your RRIF withdrawals; however, if you are resident in a country that has a tax treaty with Canada, the amount of non-resident tax may be reduced or eliminated. Some treaties apply a reduced withholding tax rate for “periodic pension payments,” which includes payments from a RRIF where the total annual withdrawals do not exceed the greater of twice the minimum amount for the year and 10 per cent of the fair market value of the property of the RRIF at the beginning of the year.
For example, under the Canada-U.S. Tax Treaty, the tax rate for non-resident withholdings is generally 25 per cent but a reduced rate of 15 per cent applies to periodic pension payments. For purposes of determining non-resident withholding tax in 2020 in these treaty cases, the government has indicated that the higher regular minimum amounts are to be used.
With the lower RRIF minimum amounts in effect for 2020, you now have more flexibility in managing your retirement savings since you can leave more of your funds in a tax-sheltered environment in 2020, if that best suits your personal cash flow needs for the year. Be sure to check with your RRIF provider to see how may be able to take advantage of the lower required minimum for 2020.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.