Do you need RRIF income?

Tax changes in 2015 let you defer some income

September 2, 2015

If you are between the ages of 71 and 94, and taking minimum withdrawals from your RRIF or LIF, then this article will be of special interest to you.

In Budget 2015, the federal government made a couple of important changes geared to allowing some people to reduce their income taxes.

Specifically, the required minimum RRIF and LIF withdrawal amount has been decreased. This means that people who do not require all of their withdrawals for living expenses can decrease these withdrawals, and therefore defer tax to later years.

Recall that if you are age 71 or over, any money you had in an RRSP had to be converted into a RRIF.  (In the case of former pension money, the conversion is from a LIRA to a LIF.)

When this change takes place, a minimum annual withdrawal is required. This is, of course, taxable. Prior to the recent budget, the minimum for a person age 71 was 7.38% of the value in the plan on December 31 of the previous year.

As an example, the required withdrawal from a $100,000 RRIF was $7,380. However, after the change in the 2015 budget, this has been decreased to 5.28%, or $5,280 per $100,000 of RRIF.

The same percentages apply to a LIF, but the LIF also has a maximum allowable withdrawal amount. Those maximums have not changed.

The Mechanics

If a person has been taking the minimum withdrawals monthly based on the old percentages, they will reach the new minimums with part of their September payment. Our firm is allowing clients to then suspend the payments for the balance of the year. I believe that other investment firms are allowing the same change.

Some people have already withdrawn their required minimum for 2015, or may keep making withdrawals to year end. In this case, CRA is allowing a re-deposit or “re-contribution” to RRIFs or LIFs within 60 days of year-end, or March 1, 2016. The amount allowed is the difference between the old minimums and the new.

Tax slips will be provided by the financial institution to total the correct resulting amount of net withdrawal.

There is a small bonus to this approach, as the 2016 minimum required withdrawal is based on the December 31, 2015 value. The re-contribution amount will not be included in this balance, thus slightly reducing the minimum for 2016.

Remember, all of this is predicated on you having other income and assets to live on, other than your RRIF and LIF withdrawals. If you depend on this income, then the change is moot.

TFSA

The other major change in 2015 for people who have unregistered investments is the increase in the TFSA contribution limit to $10,000, from the previous $5,500. This $10,000 amount will be fixed going forward, and no longer indexed to inflation.

Oh, I should mention that two of the three major political parties in the current election campaign have vowed to cancel this increase. However, since millions of Canadians have taken advantage of the higher limit for 2015 at the instruction of the Canada Revenue Agency, one would hope any rollback would not happen until 2016.

Here are the full names of some of the acronyms we’ve used here in the article.

RRSP - Registered Retirement Savings Plan

RRIF - Registered Retirement Income Fund

LIF - Life Income Fund

LIRA – Locked-in Retirement Account (which is known as a Locked in RRSP for monies that have transferred from a federally regulated pension, as opposed to provincially regulated.)

I hope you have enjoyed the last very hot week of the summer. Now, back to school!

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.

Please consult legal, tax, insurance and investment experts for advice on your unique situation.

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David Christianson, BA, CFP, R.F.P., TEP, CIMis a financial planner and advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.