RRIF rule and re-contribution changes present new retirement planning opportunities

Typically, a Registered Retirement Income Fund (RRIF) is created on the conversion of a Registered Retirement Savings Plan (RRSP) before the end of the year in which an individual turns 71. A RRIF is beneficial as it allows an individual to accumulate tax-deferred growth. However, unlike an RRSP, there is a requirement to withdraw a specified minimum amount from the RRIF beginning in the calendar year after a RRIF is established.

The 2015 Federal Budget contained positive changes that reduced the minimum amount of funds required to be withdrawn from a RRIF each year. The reduction to the “minimum withdrawal factor” allows Canadians the ability to accumulate additional retirement funds given the lower annual minimum withdrawal required. The government reduced the RRIF withdrawal factors to accommodate longer life expectancies and lower investment returns.

The minimum withdrawal factor varies by age and also increases annually. For 2015 and later years, the required minimum amount that must be withdrawn annually from a RRIF has been reduced for a RRIF holder who is 71 to 94 years old. For example, for a holder who is 71 years old, the minimum amount that must be withdrawn has been reduced from 7.38% to 5.28%.

As many Canadians have already withdrawn their minimum amounts for 2015 (based on the old minimum annual withdrawal schedule), the excess above the new minimum withdrawal factor can be re-contributed to the RRIF. The re-contribution must be made before March 1, 2016 to ensure that it will be deductible when calculating the RRIF holder’s income for the 2015 tax year.

It should be noted that the minimum withdrawal amount for 2016 is based on the Fair Market Value (FMV) of the RRIF’s property at the beginning of 2016. Thus, as a planning point, if an individual has an excess amount that they do not require, the individual should consider waiting until after January 1, 2016 (but before March 1, 2016) to re-contribute the 2015 excess. As the 2016 minimum withdrawal amount is based on the RRIF’s FMV at the beginning of 2016, deferring the re-contribution ensures that the individual’s 2016 minimum RRIF withdrawal will be based on the lower principal balance at January 1, 2016.

The KRP Team

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