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Why Canada should eliminate minimum RRIF withdrawals entirely

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An industry colleague and I were talking the other day about registered retirement income funds (I know, we aren’t the most exciting people) and he suggested the government should just remove RRIF minimum withdrawals entirely. The comment was like a lightning bolt to me. It is such a straightforward thought and, in my mind, makes a lot of sense.

What fascinates me is that seniors would love to see this change, because it would likely lower their tax bill in the short term. Our firm will quite often tell people to draw more down than the minimum, and we like to take a lifetime approach to taxes. Either way, let’s look at this idea from both the government and individual’s perspectives to see if it is something that could really work.

In 2015, the federal budget lowered the amount that had to be withdrawn from a RRIF each year starting after you turn 71. This was a pretty major change, lowering the minimum withdrawal at age 71 to 5.28 per cent from 7.38 per cent. The change was viewed as a big win by seniors’ advocacy groups, and likely resulted in a meaningful decline in taxable income for many seniors — at least in the short term.

In 2019, the federal budget announced a new advanced life deferred annuity under certain registered plans, which is an annuity that can be purchased from within an RRSP or RRIF, and where the payments can be deferred until age 85. Again, the goal was to help seniors find another way to defer, somewhat, drawing out their RRIF assets each year.

My view is that the government should stop tiptoeing around and just eliminate the minimum withdrawal altogether.

RRIF Minimum WthdrawalOverall, I believe the federal and provincial governments would collect more in tax dollars if they allowed seniors to draw out as little or as much as they wanted each year from their RRIFs. The reason is that if someone leaves as much money as possible in their RRIF, it still ultimately gets taxed when the person dies (or when the surviving spouse dies). If there is a sizeable amount in the account upon death, the entire amount is taxed as income in the final tax return, likely at a higher tax rate.

Let’s say someone has an average taxable income of $60,000 a year in retirement including their RRIF withdrawal. Their average tax rate in Ontario would be 18.4 per cent. If they had $250,000 in a RRIF when they die and another $40,000 of income in the final year, they will have an average tax bill on that large amount of 40.5 per cent, which will include a portion of the income taxed at 53.5 per cent.

Using a different example, and using a marginal tax perspective, let’s say someone drew out $15,000 a year at a 29.65-per-cent marginal tax rate for 18 years. The total withdrawal would be $270,000 and the taxes would be $80,055. If, instead, they drew out nothing for 18 years but upon death they had $540,000 of RRIF assets (due to growth and tax sheltering), they are taxed at an average rate of 46.53 per cent (assuming no other income) and about 60 per cent of the amount would be taxed at 53.5 per cent. Using the average rate, the tax bill would be $251,262.

Looking at this from the government’s side, it benefits from a potentially much higher amount of tax collection and gets a big political win from seniors who would appreciate the freedom and flexibility on their RRIF assets. But it would be hurt by collecting a lower tax amount in the short term, until the larger tax bills start to come in over time, and it would pay out a little more Old Age Security (OAS) to those who currently might be clawed back because their income is too high.

Of interest, only about five per cent of seniors are clawed back today and only two per cent lose the entire amount, according to a report from the former Human Resources Development Canada. Some of the five per cent of people would still be clawed back even without RRIF income because their overall income is too high. This shouldn’t be much of an issue for government since it could easily adjust the income numbers for clawbacks in order to not pay out more OAS under a “Freedom of RRIF Withdrawal” scenario.

On the other side, a typical Canadian senior would benefit from the flexibility to manage RRIF withdrawals as they see fit and in a way that may minimize their year-to-year tax bills, the ability to have more tax-sheltered earnings and their funds can grow faster without the near-term tax bills, the possibility of collecting more OAS and feeling more in control over their own money.

They would be hurt by a likely higher lifetime tax bill if they delay too much in drawing out their RRIF until death, and possibly spending less on themselves while they can, in order to lower tax bills.

It is not often that a new rule can be implemented that would be cheered by the electorate and likely lead to higher taxes in the long run. Eliminating RRIF withdrawals minimums could be one of those rare cases.

Reproduced from the National Post newspaper article 28th August 2019.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Four ways single seniors lose out

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Becoming single in old age could cost you tens of thousands of dollars through no fault of your own. The current tax and pension system in Canada is significantly tilted to benefit couples over singles once you are age 65 or more.

I don’t think it is an intentionally evil plan of the Canada Revenue Agency and other government agencies, but something has to change. Given the fact that so many more single seniors are female, this unfairness is almost an added tax on women.

StatsCan recently came out with census data that said that among the population aged 65 and over, 56% lived as part of a couple. This 56% of couples was split out as 72% of men, and just 44% of women. Among those aged 85 and over, 46% of men and just 10% of women lived as part of a couple. This gap is made up of two factors. Women live longer than men, and men tend to marry younger women.

Here are four ways that single seniors lose out:

  • There is no one to split income with. Since the rules changed to allow for income splitting of almost all income for those aged 65 or older, it has meaningfully lowered tax rates for some. For example, in Ontario, if one spouse has an income of $90,000 and the other has an income of $10,000, their tax bill would be $22,571. If instead, their income was $50,000 each their tax bill would only be $17,774, a pure tax savings of $4,797 per year. If you are single, you are stuck with the higher tax bill.
  • Let’s say the 65-year-old couple both make $50,000, and qualify for full Canada Pension Plan. In 2012, that would be a total of $986.67 per month at age 65 for both of them or $23,680 annually for both combined. If one passes away, the government doesn’t pay out more than the maximum for CPP to the surviving spouse. They will top up someone’s CPP if it is below the maximum, but in this case, they simply lose out almost $12,000 a year. They would receive a one-time death benefit of a maximum of $2,500, but that is all.
  • RSP/RIF gets folded into one account. This becomes important as you get older and a larger amount of money is withdrawn by a single person each year — and taxed on income. Let’s say a husband and wife each have $400,000 in their RIF and they are age 75. They are forced to withdraw $31,400 each or 7.85%. If the husband passes away, the two accounts get combined, and now his wife is 76, with a RIF of maybe $775,000. At that amount, she would have a minimum withdrawal of $61,923. As in the first example, her tax bill will be much larger when she was 76, than the combined tax bill the year before, even though they have essentially the same assets, and roughly the same income is withdrawn.
  • Old Age Security. The married couple with $50,000 of income each, both qualify for full Old Age Security — which is now $540.12 a month or $12,962 a year combined. If the husband passes away, you lose his OAS, about $6,500. On top of that, in the example in #3, the wife now has a minimum RIF income of $61,923, and combined with CPP and any other income, she is now getting OAS clawed back.

The clawback starts at $69,562, and the OAS declines by 15¢ for every $1 of income beyond $69,562. If we assume that the widow now has an income of $80,000, her OAS will be cut to $414.50 a month or another $1,500 annual hit simply because she is now single. In total, almost $8,000 of Old Age Security has now disappeared. As you can see, a couple’s net after-tax income can drop as much as $25,000 after one becomes single.

On the other side, there is no question that expenses will decline being one person instead of two, but the expenses don’t drop in half. We usually see a decline of about 15% to 30%, because items like housing and utilities usually don’t change much, and many other expenses only see small declines.

In one analysis our company did comparing the ultimate estate size of a couple who both pass away at age 90, as compared to one where one of them passes away at age 70 and the other lives to 90, the estate size was over $500,000 larger when both lived to age 90 – even with higher expenses.

So the question becomes, what can you do about this?
I have three suggestions:

  • Write a letter to your MP along with this article, and demand that the tax system be made more fair for single seniors. You may also want to send a letter to Status of Women Minister Rona Ambrose, as this issue clearly affects women more than men.
  • Look at having permanent life insurance on both members of a couple to compensate for the gaps. Many people have life insurance that they drop after a certain age. The life insurance option certainly isn’t a necessity, but can be a solution that provides a better return on investment than many alternatives and covers off this gap well. If you have sufficient wealth that you will be leaving a meaningful estate anyway, this usually will grow the overall estate value as compared to not having the insurance — and not hurt your standard of living in any way.
  • Consider a common law relationship for tax purposes. I am only half joking. If two single seniors get together and write a pre-nuptial agreement to protect assets in the case of a separation or death, you can both benefit from the tax savings.

Ultimately, the status quo is simply unfair to single seniors, and that needs to change.

Ted Rechtshaffen is a regular contributor to the National Post, see http://business.financialpost.com/author/fptedrechtshaffen/

If you have questions or want to discuss your personal situation, please call Ted at 1-888-816-8927 x221 or email him at tedr@tridelta.ca.

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