It has been quite the year so far and many people are experiencing financial difficulties they never expected.
And for those with retirement savings, the impact of the stock market downturn can feel intimidating. The good news is, those under the age of 71 have the option to wait it out in hopes that the market makes a recovery.
Those who are over 71 are not as lucky.
If you are one of those Canadians who is over 71, you will have collapsed your RRSP (Registered Retirement Savings Plan.
When you did so, you would have had 3 options.
- Take it Out in Cash
- Purchase an Annuity
- Rolling Money in a RRIF (Registered Retirement Investment Fund)
If you opted to roll your money into an RRIF, you likely kept your money invested and you are now required to withdraw a certain percentage of your savings by the end of the year based on the balance as of January 1.
But with the stock market on a downturn, the value of these RRIFs are now less than they were at the beginning of the year, which means to make the correct withdrawal, holders of RRIFs will have to sell investments at a loss to make the required withdrawal. And this would ultimately leave your account short of funds that were designated to stay in place and earn further investment income for future years.
Luckily, the government has recognized the issues this poses for retirees holding RRIFs and has made a one time change to the RRIF rules for 2020.
For those who have not yet made their full RRIF withdrawal (including withdrawals from locked-in RRIFs such as Life Income Funds), the required amount for withdrawal has been reduced by 25%.
To determine what your adjusted minimum withdrawal amount is for 2020, use the following equation:
Adjusted Minimum Withdrawal = RRIF Balance at January 1 x % Required to Withdraw x 75%
Example A:
Your RRIF was valued at $600,000 at January 1 and your normal withdrawal percentage is 2% for a total withdrawal of $12,000 ($600,000 x 2%).
Adjusted Minimum Withdrawal = RRIF Balance at January 1 x % Required to Withdraw x 75%
Adjusted Minimum Withdrawal = $600,000 x 2% x 75%
Adjusted Minimum Withdrawal = $9,000
NOTE: RRIF holders who withdrew more than the minimum amount before the change was made cannot return the 25% reduction to their account.
Example B:
Using the above example, if on January 20, you withdrew the full $12,000 based on the original required withdrawal amount for 2020, you cannot return the difference of $3,000 based on the new reduced amount ($12,000 - $9,000).
In situations where retirees receive their withdrawals as monthly payments, the holder of the RRIF can request that the remaining monthly payments be reduced to meet the adjusted withdrawal percentage.
Example C:
Using the above example, if your regular monthly payment is $1,000 ($12,000 / 12) and you received full payments for January, February, March and April for a total of $4,000 ($1,000 x 4), then you can reduce the adjusted minimum required withdrawal by this amount and spread the remaining amount over the remaining 8 months.
New Monthly Payment = (Adjusted Minimum Withdrawal – Payments To Date) / months remaining
New Monthly Payment = ($9,000 - $4,000) / 8 = $5,000 / 8 = $625
For more information on how the adjusted minimum required RRIF withdrawal applies to your situation, please contact us today.
