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 pre determined percentage that must come out every year:
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:
1. Seniors are forced to withdraw more than they actually need to spend — but must pay tax on the whole amount.
2. Withdrawal rates of 7% to 20% are far beyond expected investment returns of either stocks or bonds. The byproduct is seniors who are forced to break into 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I think the RRIF min rules are outdated and should be changed but at the same time, I’m not sure the minimum income rules are forcing people to run out of money too quickly.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 though a period where you are in a lower tax bracket.