Posted by Tim Stobbs on December 1, 2008
Well last week I had it all planned out. I was going to write about that proposed one time reduction of RRIF withdrawals to help out seniors. Yet now it starting to look like the government that proposed that change might not survive the vote to get passed into law.
Yet despite that fact I think the issue is still important to discuss. You see there seems to be a fair amount of confusion on being forced to sell assests when you take money out of a RRIF (Registered Retirement Income Fund).
A RRIF is sort of the inverse of an RRSP. It’s used to draw down your RRSP amounts to ensure all that tax sheltered money you have made over the years eventally gets taxed at some point. Starting at age 71 you have to close out your RRSP. One of your choices at that time is to convert the RRSP to a RRIF. That way most of the money stays tax sheltered and you still control your investments. The only problem is now with a RRIF you have to take out a mimimum amount of money from your account each year.
That amount is determined at the start of a year with your RRIF balance at that time. So for this year a lot of seniors are faces a problem. If, for example, a 71 year old has a new RRIF with a $500,000 in January 2008 they have to take out a minimum of $36,900. Yet because of the recent market drop if they had half bonds and half stocks their current balance is likely closer to $400,000 or less. So that $36,900 is a much larger % of their current RRIF value than normal.
So to help this out it was proposed to reduce the minimum withdrawal this year only by 25%. So potentially that would get a lot of seniors out of a tight spot this year, because all of them don’t want to sell their stocks in a down market. The issue with the idea is it ignores a little fact. You don’t have to sell stocks to make a RRIF withdrawal. You could get move it to a TFSA or taxable account in kind. That way you don’t sell anything until a later date.
Of course the downside of that move is you don’t have any cash to pay off the amount you owe from moving the asset out of the RRIF. In our example above assuming no other income the tax bill would be about $6500 without the new rule. So if you don’t have any cash reserves or bonds you can tap you might be in trouble and have to sell a stock at reduced value.
So that’s today’s lesson. Don’t assume you have to sell anything from a RRIF when you make a withdrawal and make sure to keep some cash and fixed income investments on hand to help cover issues that come around like this year’s poor performance.