RRIF changes as a result of COVID-19

Based on the MoneyTalk Life article published May 12, 2020

The economy is changing and investments — including those held in your RRIF — may have seen declines. Tannis Dawson, a High Net Worth Planner at TD Wealth, answers your questions on new relief rules for RRIFs and how to manage your retirement income in this unprecedented time.

What are the changes around Registered Retirement Income Fund (RRIF) withdrawals?

The government has lowered the minimum mandatory annual RRIF withdrawal, for the 2020 taxation year by 25%. It's important to remember that the required withdrawal varies with age. For example, a RRIF holder who is 71 years of age was previously required to withdraw 5.28% of their January 1 RRIF value. Under the new rule, they only have to withdraw 3.96% of that value.

Put another way, if your mandatory withdrawal for this year was $10,000, you would only be required to withdraw $7,500.

Some facts worth remembering:

  • The minimum withdrawal has been lowered but you can withdraw more than the minimum if you want
  • The minimum RRIF withdrawal percentage increases incrementally with your age
  • All RRIF withdrawals are considered to be taxable income. The amount of tax you will pay would be dependent on your specific tax bracket

Why did the government lower the minimum withdrawal for RRIFs?

The government has lowered the minimum withdrawal for RRIFs in response to declines in financial markets that have occurred during the COVID-19 pandemic. Since those who hold investments in a RRIF are required to withdraw a portion of the January 1 value of their RRIF every year they may in fact be forced to sell investments that have declined sharply or have not yet reached their planned potential. Allowing holders to make a lower withdrawal at this time may afford a certain amount of relief in that more funds can stay in the RRIF and have a chance to rebound.

What if I've already made a withdrawal?

The government has announced that if you've already withdrawn more than the newly reduced minimum, you won't be able to recontribute the excess to your RRIF. If you've made a partial withdrawal, you may be able to reduce subsequent payments so that total 2020 withdrawals are within the newly reduced minimum amount.

You should also be mindful that there is, of course, a practical consideration of withdrawing enough money from your RRIF to live off of. Reducing the amount taken from a RRIF may leave you short if you had planned on a certain amount being available every year. You should consult with a financial professional to see whether it makes sense to withdraw the new lower minimum in this time period, what other streams of retirement income are available, and what is most tax-efficient.

How has the COVID-19 pandemic affected my RRIF?

First, remember a RRIF is a registered plan where funds you hold can grow tax-free until you withdraw them. RRIFs themselves will not be impacted by the markets but there's a chance the investments held within the RRIF may have seen a decline. Everyone's RRIF holdings are unique, containing different types of investments: cash, GICs, mutual funds, ETFs, stocks and bonds.

How seriously your RRIF holdings may have suffered may depend on what kind of investments you have. While you may have seen the value of your investments, some economists are predicting the market downturn could be short. An investment may have declined, but it may also bounce back in the future. Any losses are not realized until investments are sold: In this way, we have flexibility to choose what investments to use when RRIF withdrawals are made.

Should I make changes to my investments to help keep my RRIF safe?

Seeing losses or declines in your statement can certainly cause concern and may provoke you into making snap decisions about your retirement funds. But you shouldn't panic right away. We're naturally provoked into action when bad news hits but if that action is not well-thought out or focused, it could make it worse. It's been proven that we feel losses more keenly than gains so it's important to put recent events into perspective and remember the long string of positive years on the market. Before making quick actions, consult with a financial representative on your options.

If you're frustrated and feel the need to do something to help your investments, consider that doing nothing may actually be doing something: you've made an investment plan for your RRIF that can sustain growth over a long time period. Jumping out of your investments right now thinking you can jump back in again when the markets turn around may not be the optimal way to invest: By doing nothing, you would avoid making paper losses real, and you may miss the best opportunities for growth.

What's the difference between a RRIF and a financial plan?

A RRIF is an investment component (or account) of a financial plan for retirement, one which lets your investments grow tax-free until they're withdrawn. A well-rounded financial plan will also include ways to deal with expenses, taxes, and estate planning. It should also take into account other sources of income such as a pension, non-registered savings, Old Age Security (OAS), the Canada Pension Plan (CPP) or the income sources from a spouse. It can also answer the basic question of how much money you need to live on and withdraw from your RRIF: Too much money taken out may mean you may run out of funds in the long run, but not taking out enough may mean you could run into debt during the year

A good financial plan in retirement takes into consideration your goals in life and helps you foresee what you should save for down the line, such as increased healthcare costs as you age or become incapacitated.

Part of a financial plan would be to determine the investments within your RRIF so that they fit your personal character. The plan will help determine what kind of investments you need to keep your funds growing but also what kind of investments you need to generate income for your expenses. If you don't have a plan or are unsure if you're utilizing your RRIF the best way possible, now can the time to think about it.

Where can I get more information?

Talking to a financial professional is a good first step. They can help suggest a plan for your goals and help take some of the uncertainty out of finances during this time.

DISCLAIMER: This content discusses current topics of interest in a general and informational manner only and may not be appropriate in all circumstances. Please ensure that you seek advice personalized for your situation from the appropriate professional, consultant or subject matter expert on the topic of interest to you.

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