For those of you who have Retirement Income Funds accounts, or RIFs, you should soon be getting letters or notification as to what the minimum required withdrawal amount is for 2024. You can always withdraw more than the minimum, but be aware that all amounts are taxable as income in the year of the withdrawal.
The more important decisions are in what form of asset should the withdrawal be made, and when.
Do you withdraw cash, or “in kind,” which is in the form of an investment such as a stock, bond, mutual fund, etc.? And what time of year should you do so?
There are multiple ways of thinking on the answer to this question. The following is my view, although keep in mind it doesn’t apply to all personal circumstances.
I think that the RIF withdrawal should be made in the beginning of the year, preferably in kind. But if you need the cash as a retiree to cover your expenses, it’s great to know that the money is available and will provide stable payments each year. You can hold the cash in a high-interest savings account and draw from it as you need. I usually set up my clients with a monthly payment to their bank account to provide them with a steady cash flow.
For those who do not need the security of the fixed cash payment, I recommend making a dividend-paying investment equal to the value of the required minimum withdrawal amount. For example, if you withdraw Canadian bank shares, they pay a dividend no matter what account they are held in. Since the dividend is going to be paid anyway, I rather that it be paid outside of the RIF into a non-registered account. (You can opt to move some into a Tax Free Savings Account, but that adds a whole other wrinkle.) The income is taxed at a lower rate as a dividend and is entitled to the Canadian dividend tax credit. If that same dividend is paid inside the RIF account, when those funds are taken out, they are taxed 100 per cent as income.
Although the holder is giving up the tax sheltering of the dividend, eventually the funds will be taxed anyway. But it’s not possible to know when the optimal time is to make the withdrawal without knowing how long one is going to live. That means you can’t calculate the benefit of the sheltering and compounding because you don’t know what the “break even” age would be.
In this case, you can benefit from the tax saving now, versus leaving your estate to possibly pay a much larger amount at an unknown date.
There are many variables that affect what would be the best approach to this dilemma, including price appreciation of the investment, tax brackets and the overall value of the RIF. This is a situation that requires a conversation with your investment and tax professional to decide what is best for your specific situation.
Nancy Woods is portfolio manager and senior investment adviser with RBC Dominion Securities Inc.
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Nancy Woods