Counting on RRIF relief?

National Post


Last week's Conservative economic statement and update contained a measure to help seniors alleviate some of the pain associated with recent market declines in the value of their registered retirement income funds (RRIFs).

Of course, we have all witnessed the effects of that update on Ottawa this past week. The change is expected to survive when Parliament resumes on Jan. 26.

Under the current RRSP rules, by the end of the year that you turn 71, 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 an RRSP. It's a tax-sheltered plan that requires you to take out a minimum amount each year. This minimum amount, which varies by age, is prescribed by the Income Tax Act and is equal to a percentage of the opening fair market value of the RRIF assets on Jan. 1 of the particular year.

Finance Minister Jim Flaherty announced that for 2008 only, the minimum amount would be reduced by 25%.

To understand how the mechanics of this rule play out, let's take the hypothetical case of Adam, who was 76 on Jan. 1, 2008. At that time, Adam had a RRIF worth $150,000. Based on his age, he was required to take out a minimum of 7.99% of this amount in 2008, or $12,000. As a result of the change, he now has to withdraw only $9,000 this year.

Here are three scenarios showing how Adam would be affected: Scenario 1 Adam has not yet taken out his RRIF minimum for 2008. He would therefore need to withdraw the adjusted amount of only $9,000 by the end of December to meet his minimum withdrawal obligation for 2008.

Scenario 2 Adam has been withdrawing his RRIF minimum on a monthly basis, or $1,000 a month. Since we are now in December, that means he has already withdrawn $11,000 in 2008. Given that he has to withdraw only $9,000 under the new rule, he will be allowed to contribute the excess $2,000 withdrawn back into his RRIF and claim a deduction for this amount on his 2008 tax return. Adam has until March 1, 2009, or 30 days after the enacting legislation has received Royal Assent, to make this special contribution.

Scenario 3 Adam has already withdrawn $6,000 from his RRIF in 2008. This means that Adam would need to withdraw only $3,000 by year end to meet the adjusted minimum RRIF withdrawal.

Note that in Scenarios 1 and 3, the ability to withdraw less than the current legislated minimum(without the 25% proposed adjustment) will depend on whether your financial institution is willing to abide by the new rules, given the recent prorogation of Parliament until late January, 2009.

If not, then you'll simply have to withdraw the normal minimum amount by Dec. 31, 2008 and then, if you wish, re-contribute the 25% next year, once the legislation has been successfully enacted. This may actually work in your favour since it has the effect of lowering your 2009 minimum amount, which is based on the opening fair market value of your RRIF on Jan. 1, 2009.