Should RRIF minimums be changed?
I recently read an article by Jonathan Chevreau, provides a balanced perspective about some suggestions that the RRIF minimums should be lowered. So far, Ottawa has turned a deaf ear to calls to cut the minimum RRIF withdrawal rates.
The last time statutory RRIF minimums were drastically adjusted was in 1992, an era when five-year GICs paid around 10%. Real after-inflation returns were 4%, compared with under 2% today. Before then, RRIFs had to be fully depleted by age 90.
Larry MacDonald of Canadian Business also wrote an article on this issue.
Current RRIF minimum rules
If you are under the age of 71, the minimum income is simply the value of your RRIF at the beginning of the year multiplied by:
1 / (90 – age)
After 71, there is a predetermined percentage that must come out every year:
| Age | Minimum | Age | Minimum |
| 65 | 4.00% | 80 | 8.75% |
| 66 | 4.17% | 81 | 8.99% |
| 67 | 4.35% | 82 | 9.27% |
| 68 | 4.55% | 83 | 9.58% |
| 69 | 4.76% | 84 | 9.93% |
| 70 | 5.00% | 85 | 10.33% |
| 71 | 7.38% | 86 | 10.79% |
| 72 | 7.48% | 87 | 11.33% |
| 73 | 7.59% | 88 | 11.96% |
| 74 | 7.71% | 89 | 12.71% |
| 75 | 7.85% | 90 | 13.62% |
| 76 | 7.99% | 91 | 14.73% |
| 77 | 8.15% | 92 | 16.12% |
| 78 | 8.33% | 93 | 17.92% |
| 79 | 8.53% | 94+ | 20.00% |
For more information, read Minimum income for RRIFs
Reasons why RRIF minimums should be changed
Chevreau’s article cites 2 reasons why high RRIF minimums after the age of 71 can be a problem:
- Seniors are forced to withdraw more than they actually need to spend — but must pay tax on the whole amount.
- Withdrawal rates of 7% to 20% are far beyond the expected investment returns of either stocks or bonds. The byproduct is seniors who are forced to break into the capital with every passing year, with the scary prospect of outliving their money in their 90s.
Potential problems with lowering the RRIF minimums
On the other hand, “Lower RRIF minimums may work against overly frugal seniors in the long run. Those amassing huge RRIFs tend to be cautious and will likely spend less than they can afford at 71 in order to be able to spend more in their 80s and 90s. “They may never get around to spending that reserve they built up.” Odds are it will go to their children or estate.”
My two cents
I think the RRIF min rules are outdated and should be changed but at the same time, I’m not sure the minimum income rules are forcing people to run out of money too quickly. I know this does not apply to everyone but I just don’t see it.
My advice has always been to review the RRSPs as you get closer to retirement and develop some income projections so that you can develop a withdrawal strategy. Income should be based on either the need for income to enjoy retirement or it can also be based on a tax strategy to get the income at the lowest marginal tax rate possible.
Although I understand the merits of deferral, I often suggest people do not wait till 71 to take money out of their RRSPs because people who do often die with too much money.
The key is to stream the money out of the RRSP over a long period of time to spread the liability out especially through a period where you are in a lower tax bracket.
I’d love to hear your opinions. What do you think?
Comments
Jim
For sure there are ways to melt down an RRSP and they are worth pursuing — although it would mean replacing one bigger inconvenience with a lesser one.
Thanks for the comment Larry. Can you elaborate on what this means “replacing one bigger inconvenience with a lesser one.”
This doesn’t technically answer the question, but I wonder if products like the Manulife GIF addresses some of the concerns raised here? I’m sure other companies have similar seg products, I mention this one simply because my wife and I are considering it at the moment.
Thanks for the comment Art. I think the issues are actually unrelated. The GIF products still have to comply with the minimum income rules and when the minimums exceed the guaranteed withdrawals, the investors have to take out more which can actually lower the guaranteed values.
Lowering the minimum incomes, expecially after the age of 71 might help people who are taking income from these GMBW programs.
I don’t really see the connection between the RRIF minimums and how much money a senior needs to live. In my opinion, the RRIF minimums are a taxation policy.
If you consider the RRSP maximum contributions – do they represent the “proper” amount for everyone to save?
Bottom line is that a senior does not have to spend any or all of the RRIF withdrawal, so I don’t see how changing the RRIF minimums will make much of a difference for most seniors.
Thanks for stopping by Mike! Tax and income is very much related. Here’s the problem … wht if someone does not want to pay the tax because it will create OAS clawback or it pushes them into a higher MTR? the minimum income formulas might force people to take out money and pay a higher tax.
When we develop income strategies for people in retirement, it is important to consider all the issues. This includes NEED for income, taxation, investment structure, pensions, CPP, OAS, etc.
Sometimes the income needs and the RRIF minimums work well together to give the retiree what they want but other times they do not work together because the minimums are so high.
The retiree may not have to spend all of the RRIF withdrawal but how much money they get depends on the tax.
I appreciate the dialogue
Jim, my point is that the RRIF minimums aren’t necessarily designed for the benefit of the retiree. To answer your question, some retirees would benefit from lower RRIF minimums. Does that mean the government should lower them? I don’t know. 🙂
Proper financial planning and education would reduce/remove any problems the RRIF minimums cause. Of course, back in the real world, I would imagine that a lot of seniors don’t come to you for advice on this issue until they are already impacted – at which point, there isn’t a whole lot to be done.