The Impact of Mandatory RRIF Withdrawals on Seniors’ Income Security

Abstract

There has been recent advocacy for raising the age at which Canadians must convert registered retirement savings plans (RRSPs) to registered retirement income funds (RRIFs), and for reducing the annual minimum RRIF withdrawal rates or even eliminating mandatory minimum RRIF withdrawals. This article argues that mandatory RRIF withdrawals starting at age 71 may not be a threat to income security during retirement for most Canadian seniors. Forced RRIF withdrawals do not have to result in any significant dissavings. Given the modest amounts accumulated in RRSPs and RRIFs by most Canadians, the amounts withdrawn each year are likely necessary for consumption and therefore are not likely constrained by the mandatory withdrawal rules. Basic tax-planning strategies such as reinvesting RRIF withdrawals in tax-free savings accounts can further reduce the cost of mandatory withdrawals. In the interest of simplicity and reducing the compliance burden, this article also suggests that RRIF holders with up to $200,000 of accumulated savings (equivalent to the 75th percentile of RRIF balances) should be exempted from mandatory annual withdrawals. While some have argued for complete elimination of mandatory withdrawals, such a measure is not supportable from a tax policy perspective. Indefinite deferral of larger retirement savings balances may allow wealthy Canadians to use those savings for estate-planning purposes and would be a regressive measure. Furthermore, retaining wealth inside tax-deferred accounts while claiming old age security (OAS) because of low income would jeopardize the sustainability of the OAS program. OAS was not designed to withstand eligibility for seniors who are asset-rich but reluctant to draw down retirement assets that were accumulated with tax-deferred savings.

Keywords: OAS, RRIF, RRSP, TFSA, Withdrawals