By Sheryl Smolkin

By now you may be aware that there are changes to the Registered Retirement Income Fund (RRIF) withdrawal rules in the 2015 federal budget. But you may be wondering what difference it will make to you.

The basic purpose of the tax deferral provided on savings in registered pension plans (RPPs) and registered retirement savings plans (RRSPs) is to encourage and assist you to accumulate savings over your working career in order to meet your retirement income needs.

Consistent with this purpose, savings in Saskatchewan Pension Plan and RRSPs must be converted into a retirement income vehicle by age 71. In particular, unless you purchase an annuity, an RRSP must be converted to a RRIF by the end of the year in which you reach 71 years of age and a minimum amount must be withdrawn from the RRIF annually beginning the year after it is established (alternatively, the RRSP savings may be used to purchase an annuity). This treatment ensures that the tax-deferred RRSP/RRIF savings serve their intended retirement income purpose.

A formula is used to determine the required minimum amount a person must withdraw each year from a RRIF. The formula is based on a percentage factor multiplied by the value of the assets in the RRIF. The percentage factors (the RRIF factors) are based on a particular rate of return and indexing assumption.

Until this year, a senior was required to withdraw 7.38% of their RRIF in the year they are age 71 at the start of the year.  The RRIF factor increased each year until age 94 when the percentage that seniors were required to withdraw annually was capped at 20%.

The existing RRIF factors were in place since 1992. The 2015 Federal Budget adjusts the RRIF minimum withdrawal factors that apply in respect of ages 71 to 94 to better reflect more recent long-term historical real rates of return and expected inflation. As a result, the new RRIF factors will be substantially lower than the existing factors.

The new RRIF factors will range from 5.28% at age 71 to 18.79% at age 94. The percentage that you will be required to withdraw from your RRIF will remain capped at 20% at age 95 and above. Table 1 below shows the existing and proposed new RRIF factors.

TABLE 1: EXISTING AND NEW RRIF FACTORS
Age at January 1	Existing Factor %	New Factor %	Age at January 1	Existing Factor %	New Factor %
71	7.38	5.28	84	9.93	8.08
72	7.48	5.40	85	10.33	8.51
73	7.59	5.53	86	10.79	8.99
74	7.71	5.67	87	11.33	9.55
75	7.85	5.82	88	11.96	10.21
76	7.99	5.98	89	12.71	10.99
77	8.15	6.17	90	13.62	11.92
78	8.33	6.36	91	14.73	13.06
79	8.53	6.58	92	16.12	14.49
80	8.75	6.82	93	17.92	16.34
81	8.99	7.08	94	20.00	18.79
82	9.27	7.38	95+	20.00	20.00
83	9.58	7.71
SOURCE: BUDGET 2015 ANNEX 5.1

By permitting more capital preservation, the new factors will help reduce the risk that you will outlive your savings, while ensuring that the tax deferral provided on RRSP/RRIF savings continues to serve a retirement income purpose.

As illustrated in Table 2 below, the new RRIF factors will permit close to 50% more capital to be preserved to age 90, compared to the existing factors (Table 1 above).

TABLE 2: CAPITAL PRESERVED UNDER THE RRIF FACTORS
Age at January 1	Under existing RRIF factors	Under new RRIF factors	Difference (% more remaining)
71	100,000	100,000	–
80	64,000	77,000	20
85	47,000	62,000	32
90	30,000	44,000	47
95	15,000	24,000	60
100	6,000	10,000	67
1 For an individual 71 years of age at the start of 2015 with $100,000 in RRIF capital making the required minimum RRIF withdrawal each year.
2 Age 71 capital preserved at older ages is expressed in terms of the real (or constant) dollar value of the capital (i.e., the value of the capital adjusted for inflation after age 71). The calculations assume a 5% nominal rate of return on RRIF assets and 2% inflation.
SOURCE: BUDGET 2015 ANNEX 5.1

By reducing your RRIF withdrawals, you can retain more assets in your RRIF—assets that will continue to accumulate on a tax-deferred basis to support your future retirement income needs should you live to an advanced age. In addition, if you do not need your minimum RRIF withdrawal for income purposes, you can save the after-tax amount for future needs — for example, in a Tax-Free Savings Account (TFSA), if you have available TFSA contribution room.

Of course, if you need more money sooner, you can withdraw it from your RRIF and pay the tax owing. Any money that you withdraw from a RRIF will increase your income for the purposes of calculating the Old Age Security clawback and eligibility for the Guaranteed Income Supplement.

Also read: RRIF rules need updating: C.D. Howe