Overblown problems in retirement include the Old Age Security clawback and the mandatory RRIF withdrawal rules.
OAS benefits are clawed back at a rate of 15 cents for every $1 in taxable income greater than $90,997 for 2024. If your income is at that level or higher, it’s appropriate for the government to start reclaiming some of your benefits. It would not be surprising to see a more aggressive clawback some time in the future to contain the growing cost of OAS.
As for registered retirement income fund withdrawals, they are sometimes presented as an unwarranted intrusion in the life of seniors trying to conserve their savings. Registered retirement savings plans must be converted into RRIFs by the end of the year you turn 71, and withdrawals at a prescribed rate must begin the next year.
The current RRIF rules are livable, but they could better reflect the financial reality of today’s retirees. A blueprint for making this happen is contained in an article in the Canadian Tax Journal by Amin Mawani, a professor of taxation at York University’s Schulich School of Business.
The paper suggests exempting people with RRIFs worth up to $200,000 from mandatory annual withdrawals, a threshold that covers roughly nine of 10 RRIF holders. These people typically withdraw at least the minimum each year because they need money for living costs. Eliminating mandatory withdrawals would give them flexibility in how and when to access their money.
While focusing on RRIF rules, Prof. Mawani’s paper documents the fragility of retirement savings in many households and the divide between the minority with well-stuffed RRIFs and everyone else. Less than 25 per cent of eligible tax filers contribute to RRSPs on a regular basis, and the median amount contributed in 2021 was just $3,890.
“The context of this paper being written is that people don’t have enough money,” Prof. Mawani said in an interview. “This is all because our biggest single retirement asset seems to be our homes.”
RRIF withdrawal rules perennially criticized in the financial industry as a threat to the well-being of seniors, essentially forcing them to unnecessarily draw down on needed savings.
But calling for the complete elimination of RRIF withdrawals serves the interest of the 7.7 per cent of RRIF holders with more $200,000 in assets. “They’re the wealthy who have so much money that they would like to use it for estate planning and not for retirement,” Prof. Mawani said.
RRIFs are not an ideal estate planning tool because they’re eventually fully taxable. But investments in a RRIF are sheltered from taxes as they compound over the years and can produce a substantial legacy for your heirs.
Eliminating the RRIF withdrawal requirement for all takes tax revenue away from a federal government that already spends more than it takes in. Prof. Mawani also sees a negative effect on Old Age Security, which is one of the federal government’s biggest expenses.
“Retaining wealth in tax-sheltered accounts while claiming OAS because of low reported income can jeopardize the sustainability of the OAS program,” he writes in the paper.
Exempting people with RRIFs valued at up to $200,000 from mandatory withdrawals is likely to leave government revenues unaffected, Prof. Mawani said. The reason is that these people will make RRIF withdrawals on their own, out of necessity.
People with larger RRIFs who are required to make withdrawals will have to pay tax on that money, which can seem onerous. But Prof. Mawani notes that taxes paid on RRIF withdrawals were offset years earlier with tax deductions for adding money to RRSPs.
As for what to do with unneeded RRIF withdrawals, Prof. Mawani said one option is to make an in-kind withdrawal of a stock or fund and add it to a non-registered account. From there, capital gains and dividends would be taxed at a preferential rate.
Another option for unneeded RRIF withdrawals is a tax-free savings account, which allows people 18 and older to contribute up to $7,000 in 2024. In a TFSA, all future gains and withdrawals are tax-free.
Two other potential adjustments to RRIF withdrawals would be to push back the starting age and reduce the minimum amount each year. Prof. Mawani thinks they’re best left where they are, but he’s open to a high exemption threshold for RRIF withdrawals in the future if average RRIF balances increase from current levels.
His theory on how that might happen: Priced out of housing, more people rent and invest money in RRSPs that get turned into RRIFs.
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