RRIF rule changes from 2015 Federal Budget

When a RRSP holder reaches age 71, the plan must either be collapsed entirely or converted to income.  The plan of choice for most is a Registered Retirement Income Fund (RRIF) – an account type that has almost all the same characteristics and rules as a RRSP, except that it requires the planholder to withdraw a certain percentage each year, with that amount being taxable income.

Since the early 1980s interest rates have fallen almost every year, creating tremendous unexpected problems for people who chose to hold their money in fixed-income deposits of all sorts.  An investment of $100,000 that may have once paid $15,000 per year may only pay $1,500 per year today, meaning the investor has seen a decline of interest income in the order of 90% – and that is before the fact the cost of living has tripled is factored in.

Statutory RRIF withdrawal rates were set at a time when interest rates were much higher than they are today.  With the decline of interest rates, RRIF plans holding only fixed income investments start to deplete at age 71 (7.38% withdrawal required) and this only accelerates with age.  The 2015 Federal Budget has reduced the required withdrawal rates so as to allow RRIF accounts to be depleted more slowly and produce a steadier income over time.  The chart below shows the old and new rates in a visual format and below it is a table showing the exact numbers.

The Budget must become law and RRIF administrators will have to reprogram systems, so this does not take full effect immediately, but it should be a matter of only months before full implementation.  Thus, if your RRIF is set to pay out only the minimum amount, you should expect the payment for 2016 to be smaller than the previous one.  Since the budget says the new numbers will apply for 2015, if your RRIF is set to payout once a year near year-end, it may well be reduced too.