New rules coming?? | RRSPs and RRIFs | Discussion forum

I remember the day when budget leaks were frowned upon and far less common than today. It seems that now they come out like news bulletins.

While I can understand the appeal of such changes, I think it is likely that in the end they will benefit the gov't more than the taxpayer. If you get to delay withdrawing money from your RRSP/RRIF even further, and you do it, it increases the likelihood that, in the end, the incomes tax on your final return will be in the 50% range. For most people, as most people are not anywhere near the 50% tax bracket, they would be better off to take it out sooner, on a gradual basis.

You need to figure out what your tax bracket is likely to be for the rest of your life, make adjustments according to whether you have a spouse, and make withdrawals to maximize your tax bracket, and do it earlier rather than later.

For those who are highly organized, disciplined, have a good plan and have sufficient discretionary income, being able to postpone mandatory withdrawals provides another flexibility tool which may be useful in certain situations, but most people do not fall into this category and, I predict, will end up paying more tax at the end of the day. The good news is that they won't be around to regret it.

I usually agree with CARP but, in this case, don't see the benefit for most people. It's something people want but may not serve them well in the end.

On the other hand, the government will need the money to help offset the losses from increasing the TFSA contribution limit.

Death and taxes are very reliable eventualities.

Yes, I know that yours is the prevailing view, Bill.
I still think it's not going to help most people, for the reasons outlined.

It doesn't make sense to get into a position where, all of a sudden, at the end of life, you need cash to pay for extra medical care, and the only way to lay your hands on it is to cash in RIFs, because you will probably be paying the maximum tax rate and may find you don't have as much as you thought you had, which is a really bad time to find out.

The way to avoid this is to plan withdrawals (or buy annuities) so that the likelihood of this situation arising is minimized. However, most people won't likely do that, and they will not be helped by extending the timeline for withdrawals.

The situation really requires more education, so that people realize that RRSPs aren't the best thing for everyone in the first place, and that they are only a tax-deferral system, not tax avoidance. If people really appreciated that, they would not get themselves into this difficult position, and would plan their withdrawals according to their tax bracket. The accountant tells me he runs into this all the time, with people being shocked by the sudden realization that they don't have as much money as they thought they did because of their tax liability. No wonder RRSPs are becoming less popular.

It's great to know that our chances of longevity are improving, but it's only an average, and speculative. Live to 70 and you will have lost a number of people of similar age already. I guarantee it. We need to plan for that possibility just as much as its opposite. It would be a lot easier to find the money for health care in old age if it were already in a non-RSP/RIF account.

So, don't leave your RSP/RIF withdrawals to age 71 or 75 or whatever the new minimum is without a thorough review of your tax situation. Don't be lulled by the flexibility to postpone withdrawals. Plan your withdrawals according to your tax bracket. This is the best way to make sure you don't get creamed by this new flexibility.

However, I'm sure this will not be a problem for most members of this forum.

Rick said

Re April budget.... minor adjustment to minimum withdrawal percentages. On the fence as to how it will affect me when I retire in 2018.

The changes are skewed at the lower end, so that mandatory withdrawals in year 71 is reduced significantly, to 5.28%. However, it creeps up at a faster rate so that by age 95, you will be in the same place you were previously at age 94. The 20% withdrawal rate now starts at 95.

The reasoning behind the change is fairly sound. It is designed to reflect a mixture of the expected rate of investment return, pegged now at 5% instead of 7%, plus 2% indexing for inflation as opposed to 1% before - at least this is what the gov't says. I was not familiar with how it was calculated before, so can't confirm, but it seems to make sense.

The gov't also claims that someone at age 90 will have more money still in their RIF than they did previously. This is also likely true, and supports what I said earlier.

My suggestion is that nobody should use these minimums as an indicator of what they should withdraw except inasmuch as you have to take out the minimum. The actual amount should be largely dictated by your tax situation, so that you don't end up dying at age 90 and leaving half of it to the government.