Can my Registered Retirement Income Fund catch the COVID-19 virus? Unfortunately, in a way, it has already.
Although the impact of COVID-19 on health and mortality is the most critical issue, it has rendered the Canadian and world economies sick as well. The government has acknowledged this by placing in motion several programs to buffer the worst effects of the failing economy and disappearance of employment income.
Among them is an increase in Farm Credit Canada’s lending capacity by $5 billion to assist the agriculture and food industries in overcoming some of the effects of COVID-19. The government has also appeared surprisingly flexible in adjusting the programs to catch those Canadians who fell through the cracks in the first wave.
One of the original announcements was to reduce by 25 percent the minimum required annual withdrawals from Registered Retirement Income Funds (RRIFs). Perhaps this program should also be reexamined.
Many Canadians established their RRIFs to absorb the mandatory collapse of their RRSPs at age 69 before 2007 and 71 afterwards. Many of those RRIFs contain stock portfolios, which reflect the recent collapse of financial markets. The value of those investments may have fallen anywhere from 35 to 50 percent. That has potentially wiped out hundreds of millions of dollars in hard-earned retirement income for Canadian seniors.
Those losses are only set in stone if the deflated shares are sold. Unfortunately, those shares might have to be sold when the mandatory annual withdrawal levels kick in.
These withdrawals affect older Canadians far more severely than the younger 71 year olds. For instance, if you are 95, you must withdraw 20 percent of your RIFF. It drops to 10.99 percent at 90, 6.58 percent at 80 and down to 5.28 percent at 71.
Although, undoubtedly, a 25 percent reduction in minimum withdrawal is a welcome measure, it might not cover the losses in the securities that must be sold to meet the requirement. If you are fortunate enough to have cash in your RRIF account to cover the mandatory payment, use it first before selling your stocks.
The withdrawal doesn’t have to be made until year-end, which might allow some recovery in the value of your stocks. We don’t hear many financial experts who are predicting financial markets to fully recover any time soon.
Perhaps a more sensitive response by government would be to waive completely the mandatory withdrawal for this year and possibly next. This would not prevent any RRIF-holders from making voluntary withdrawals from their accounts, if so desired.
There is a similar impact on Canadians who reach the age of 71 this year and must collapse their RRSPs. If they do so, the entire value of the account is considered as 2019 income and any losses, unfortunately, will be locked in. If they transfer their entire RRSP to a RRIF as is or in kind, their portfolio will be sheltered intact with the exception of the mandatory withdrawal required by the end of 2021. Once again, perhaps a more helpful measure might be to allow those turning 71 this year to delay the collapse of their RRSP until next year.
Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: firstname.lastname@example.org or 800-265-1002.