RRIF 25% MINIMUM REDUCTION ON THE TABLE: WHY WAITING TO WITHDRAW COULD BE A SMART MOVE

In the lead-up to the federal election — and amid market volatility driven by ongoing trade tensions — the Liberal government proposed a temporary 25% reduction in the minimum required withdrawals from Registered Retirement Income Funds (RRIFs) for one year.

The aim: to give retirees more flexibility in a bear market and help them avoid selling investments at a loss just to meet withdrawal rules. Although not yet law, the proposal has already prompted many advisors to revisit withdrawal strategies. For clients who don’t need immediate income from their RRIFs, deferring withdrawals could lead to better tax outcomes and improved portfolio longevity.

The House of Commons will reconvene from May 26 to June 20 — a window during which further clarity is expected on whether the proposed changes will move forward. Until then, retirees may wish to hold off on making scheduled withdrawals, particularly if their financial situation allows for some latitude.

LOOKING BACK: A FAMILIAR STRATEGY IN UNCERTAIN TIMES

Historically, this isn’t the first time the government has proposed a temporary RRIF minimum reduction in response to economic turbulence:

• 2008 Financial Crisis: RRIF minimums were reduced by 25%. Importantly, retirees were allowed to recontribute any withdrawals made above the new minimum amount.
• 2020 Pandemic Market Decline: Again, RRIF minimums were reduced by 25%. However, unlike 2008, excess withdrawals could not be recontributed. Timing could have played a role. In 2008, the announcement came later in the year, giving retirees more time to adjust withdrawals, whereas in 2020 the decision came in March.

QUICK REFRESHER: RRIF WITHDRAWAL RULES

• RRSPs must convert to RRIFs by December 31 of the year in which a taxpayer turns 71.
• Minimum annual withdrawals must begin the following year and are based on the RRIF’s fair market value on January 1, multiplied by a prescribed aged-based factor.
• The withdrawal factors were last revised in 2015, reducing minimums by nearly 30% (the first update to minimums since 1992). At that time, the government allowed recontribution of excess withdrawals, deductible for tax purposes.

BOTTOM LINE

For retirees who do not currently need cash flow from their RRIFs, it may be wise to wait. Acting before the temporary reduction is finalized could result in unnecessary withdrawals and missed opportunities for tax planning. Reach out to talk to one of our advisors about strategies specific to your situation.