Over the past several decades since the federal government last established the withdrawal minimums on RRIFS (Registered Retirement Income Funds), the longevity of retirees has increased substantially.
The result? High mandatory minimum withdrawal rates have caused anxiety among many retirees, worried that their savings could be prematurely exhausted.
Finally, after years of public lobbying, and much debate, the government has announced long-overdue, but very welcome changes.
The recent federal budget established new RRIF rules, which become effective immediately.
The minimum draw requirement at age 71 has been reduced from the previous 7.38% of the RRIF value, to 5.28% — a dramatic change for the better. Although the withdrawal percentage continues to increase with age, it now takes an additional 11 years, before the previous 7.38% minimum withdrawal level is reached — at age 82.
Draws from an RRIF may, as before, commence any time after age 55. Nor is there a change in the requirement that conversion to an RRIF must occur no later than age 71, and that draws must commence no later than the calendar year in which the RRIF holder reaches age 72.
However, the new minimum draw, now mandated at age 72, has been reduced to 5.4% of RRIF value, from the previous 7.48%.
For those planning to convert their RRSP to a RRIF before age 71, the minimum-draw percentages remain at their previous levels, which were always much more reasonable.
Based on the pre-2015 budget rules, some of you may already have withdrawn the full 2015 lump-sum from your RRIF. If you wish to take advantage of the new lower withdrawal rate, you may re-contribute the 2015 excess you withdrew — as long as you do so by February 29, 2016.
These major RRIF changes have two main benefits for the retiree.
First, he/she is no longer forced to withdraw more from the RRIF than is required to maintain a desired standard of living — thereby allowing greater savings to grow and compound, tax-free, for future years.
Second, for those retirees fortunate enough to have achieved a considerable taxable income, the previous, higher withdrawal percentages often triggered a partial claw-back of OAS benefits.
This claw-back begins at taxable incomes of approximately $72,000 annually. Now, by reducing RRIF draws to the new minimums, taxable income decreases; as a result, at least some of the OAS claw-back should be reduced.
There is no question that the federal budget’s new RRIF rules, and the simultaneous enhancement of TFSA eligibility to $10,000 annually are both of great benefit, not only to retirees but to all Canadians.
Although this may have been designed as a voter-friendly budget in an election year, it is also a balanced one, which makes these welcome changes affordable.
Most of us will benefit, either immediately, or in the future. We should be very pleased.
A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his most recent, The Smart Canadian Wealth-Builder.