RRIF rules need to change to keep up

National Post

2008-08-09


Outdated factors not in line with life expectancy

While there has been much attention focused on the new Tax Free Savings Account, it's important not to forget about its older siblings -- the RRSP and the RRIF (registered retirement income fund). And the renewed grumblings about forced withdrawals will ensure RRIFs maintain their share of the spotlight.

By the end of the year that you turn 71, the tax rules governing your RRSP state that you must either cash in your RRSP and pay tax on its fair market value, purchase an annuity with the RRSP funds or convert it to a RRIF.

A RRIF is basically the opposite of a RRSP. It's a tax-sheltered plan that requires you to take out a minimum amount each year. This amount, which varies by age, is prescribed by the Income Tax Act and is equal to a percentage of the fair market value of your RRIF assets on Jan. 1 of the particular year it is opened.

For example, let's say you turn 71 in 2008. If you choose the RRIF option, in 2009 you will be required to withdraw a minimum of nearly 7.5% of the RRIF's value as of Jan. 1, 2009.

By age 94, this required RRIF minimum withdrawal reaches 20% of the plan's value and remains at 20% for the rest of your life.

It's this forced withdrawal -- whether or not you need the money -- that has raised the ire of many seniors who would prefer to leave their retirement nest egg in a tax-sheltered environment as long as possible.

The problem is exacerbated when forced RRIF withdrawals cause seniors to lose part or all of their Guaranteed Income Supplement (GIS) or Old Age Security (OAS), both of which are clawed back based on your income-- which includes RRIF withdrawals.

Last month, the C. D. Howe Institute published a paper calling on the government to completely abolish required RRIF minimums. The study, entitled "A Better Riff on Retirement: The Case for Lower Minimum Withdrawals from Registered Retirement Income Funds," noted that in the time since the RRIF factors were last set in 1992, life expectancy has increased while returns on investments have dropped.

The combination of these two factors results in RRIF holders facing a "dramatic erosion in the purchasing power of tax-deferred savings in their later years."

If complete abolition is too harsh a pill for the government to swallow, it should at least adjust the RRIF rules to take into account today's longer life expectancy and lower investment returns.

As the report's author Bill Robson writes, "One way or another, the RRIF drawdown rules need liberalizing.… Governments' impatience for revenue should not force [Canadians] to run down their tax-deferred assets prematurely."