Navigating New Rules: Should You Reduce Your RRIF Withdrawal in 2020?
Topic: Tax Planning, Wealth Planning
April 21, 2020
Image used with permission: iStock/fizkes
Navigating New Rules: Should You Reduce Your RRIF Withdrawal in 2020?
In these challenging times – when health and wealth are top of mind – we feel the need for action. The impulse to do something, other than hurry up and wait, is powerful. The two pillars of portfolio longevity that investors can control are spending less and avoiding locking in losses during market downturns.
The Federal Government has offered a way for retired investors to achieve a bit of both. As part of the pandemic relief response, for 2020 only, they have allowed a reduction of up to 25% to the minimum Registered Retirement Income Fund (RRIF) withdrawal required. The purpose of the reduction is to help investors with RRIFs, and similar accounts, to avoid selling assets unnecessarily, given the current uncertain and volatile market conditions, especially if they don’t need to spend all of their RRIF withdrawal. This way, more of your funds remain in a tax-deferred environment to be able to participate in a market recovery, when that happens. Just because the government has offered this up as an option, it doesn’t necessarily mean you should do it without thinking about your bigger financial picture. Also, for some, the difference simply isn’t material enough to consider. While the 25% reduction will definitely be helpful for some retirees, there are other ways to preserve the longevity of your portfolio without reducing your RRIF withdrawal, the merits of which depend on your own financial circumstances.
To help you decide whether to take advantage of the 25% minimum RRIF reduction, consider the following:
- Do you need the cashflow from your RRIF?
- What is the asset mix of your RRIF?
- What do you expect your total taxable income will be in 2020?
- Do you have other resources such as a non-registered account or a TFSA?
Cashflow
If you need the cashflow and have no other resources other than a RRIF, then there is no choice but to take out the regular RRIF minimum. However, if you don’t need the cashflow from your RRIF, then before reducing the minimum, consider the answers to questions 2, 3 and 4 above.
Asset Mix
If your RRIF has a high equity allocation, then you might indeed benefit from a reduction in the minimum withdrawal. However, if it has a conservative asset mix, as would be the case for clients invested in our Nexus N.A. Income Fund, then you won’t necessarily be locking in any material losses by withdrawing funds from your RRIF. If this is the case, you then need to turn your mind to income tax and whether you have any other financial resources.
Income Tax and Other Resources
If you have other resources, such as a non-registered account or TFSA, before reducing your RRIF withdrawal, consider what your taxable income will look like in 2020. You may, for example, have reduced or no capital gains this year, so your taxable income will already be lower than normal. This means your average tax rate might decline in 2020. If this is the case, then your RRIF income would be taxed at a lower marginal rate this year without reducing the minimum withdrawal. What you want to avoid is deferring 25% of your minimum RRIF income this year, only to end up paying a higher tax rate on that income in future years.
Having said all this, it is always better for portfolio longevity to spend less rather than more. While it may make good income tax sense to take out the regular RRIF withdrawal this year because your overall income tax might be lower on that income, you don’t need to feel compelled to spend the full amount. Your overall portfolio can still benefit if you add the part of your RRIF withdrawal that you don’t spend to your non-registered account and / or your TFSA (if you have room). This is another way to keep the funds invested for when the market recovers down the road. Going this route, you can still achieve the goals of spending less and keeping funds invested, but also potentially paying less income tax!
Finally, if it turns out you will be in the same tax bracket today and in the future, whether you take out the regular minimum RRIF withdrawal or the reduced 2020 minimum, and you don’t need the income, then take advantage of the 25% reduction being offered – assuming, of course, that the difference is material to you.
After consideration, if you are still not sure one way or the other, you might appreciate the “forced savings” that the 25% reduced minimum withdrawal affords you, and that is okay too.