How much should you withdraw from your RRIF?

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Sandy wants to deplete a registered retirement income fund by age 90 and wonders how much to take out each year.

How much should you withdraw from your RRIF?

Q. I am 78 and have $330,000 in my RRIF account. How much should I withdraw each year so it is depleted by age 90?
–Sandy

A. If I understand your question, Sandy, it sounds like you want to draw down your registered retirement income fund (RRIF) on a schedule aligned with your life expectancy. A 78-year-old woman has a 50% probability of living to age 92, and for a man, it is age 90.

There are a few considerations. As you likely know, there is a formula to determine the minimum withdrawal from your RRIF account each year. Assuming you turned 78 this year and were 77 at the start of the year, and your account value was $330,000 at the end of 2020, your minimum withdrawal would be 6.17% of the account value, or about $20,361.

If your account is a regular RRIF and not a locked-in RRIF that came from a pension plan transfer, you have no maximum withdrawal limit. You can cash in the whole account in one shot, if you would like, but that withdrawal would be fully taxable. If you die, and have no spouse, your RRIF account is deemed to be fully withdrawn and fully taxable on your final tax return. Depending upon your other sources of income and where you live, your tax payable on the RRIF value could be well over 50%. 

As for how much to withdraw each year, we can answer your question in a few different ways. If you divide $330,000 by 12 (the number of years until you turn 90), you could take a withdrawal of $27,500. However, that assumes a 0% rate of return.

If your RRIF returned 3% each year, you could withdraw $32,187 for 12 years. However, if you wanted your withdrawals to rise each year with inflation, again assuming the account earned 3% annually, your withdrawals would begin at $28,999, and rise by 2% each year. 

So, the short answer, Sandy, is you could withdraw about $30,000 per year, which is much higher than your minimum withdrawal.

I think you need to determine what your primary goal is for your account. If you want to spend the money, you should consider other assets you have, including other investment accounts or real estate you own. Some combination of higher RRIF withdrawals and taking money from other sources may be best.

If you want to minimize tax, you should consider your other sources of income, tax deductions and tax credits. Taking extra RRIF withdrawals may enable you to take advantage of your low tax brackets each year and potentially contribute to a tax-free savings account (TFSA) to have future investment returns earned tax-free. TFSA accounts are also tax-free on death, unlike fully taxable RRIF accounts. 

If you are philanthropic, you may be able to take extra RRIF withdrawals and donate the money to charity to receive a tax refund. If your pensions and RRIF withdrawals total $40,000, for example, Sandy, and you took an extra $10,000 from your RRIF to donate to charity, the tax implication could be anywhere from basically neutral to more than $2,000 in tax refunds, depending on your province or territory of residence, tax deductions and tax credits. 

If you have a spouse or common-law partner, you may be able to split your RRIF withdrawals with them and have up to 50% of the withdrawal taxed on their tax return, at their personal income tax rate. If their income is lower than yours, you may save tax as a family by using this pension income-splitting technique. 

There are several considerations for RRIF withdrawals, depending on your goals. The amount you should take out depends on different factors as well. The key is that your minimum withdrawal from your RRIF is just a starting point. Taking out more can actually save you tax, annually and on death, and if you can afford to do so without running out of money, it can even be advisable.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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