Government Budgets – 2015 – TFSAs & RRIFs
By WALKER MOONEY BA CIM
With so much information in the news cycle, any discussion of the Federal or BC Budget seems like old news. However, I believe it is still noteworthy that the Federal Conservatives and the B.C. Liberals were both able to bring down balanced budgets. This represents a significant fiscal achievement in the current economic and political environment. It is evident by virtue of how few governments around the world have been able to achieve the same result.
With respect to the Federal Budget, there are a few provisions which may have a significant impact on individuals in dealing with their financial planning. Today, I will just note a few points about two – TFSAs and RRIFs.
The first is the increase from $5,500 to $10,000 in the annual contribution allowed to a TFSA. For most Canadian residents who are able to accumulate capital outside of registered savings plans, investment through a TFSA will generate a very beneficial financial result. There are few situations where such utilization does not make sense.
Just as a reminder, here are the basic provisions of a TFSA:
■ Annual contribution limit is $10,000 and is not indexed
■ $10,000 applies to the 2015 year
■ Available to Canadian residents aged 18 and over
■ Contributions are not deductible for tax purposes
■ Any investment income earned is not taxable
■ Investment options are the same as for RRSPs or RRIFs
■ Unutilized previous contribution limits can be carried forward and, including 2015, now equal $41,000
■ Both the capital contributed and income earned may be withdrawn if you choose, with no tax assessed
■ Any amount withdrawn may be re-contributed; however, it must be in a future calendar year
Thus, over time, TFSAs can generate a significant pool of non-registered funds that can be held as part of your overall investment portfolio while remaining readily available to meet future personal expenses without current or future tax cost.
Reduced RRIF Withdrawal Rates
The federal budget contains a provision to reduce the required minimum withdrawal rate that applies to RRIFs. It represents roughly a 25%-30% decrease in the minimum required withdrawal.
Since the existing schedule was last set, we have experienced a major decline in interest rates. As a result, conservative investors who wished to generate a steady reasonable income stream from GICs or bonds, either government or corporate, or from dividends on preferred or common equities were challenged. In many cases, the lower returns, in combination with the higher % withdrawal schedule, was depleting their RRIFs at too fast a rate to continue to finance income throughout retirement. This was of significant importance where the RRIF was the major source of retirement income, especially in view of the increase in life expectancy in Canada.
To counter the low fixed income returns, a number of investors responded by investing a greater portion of their holdings in equities to generate dividends and capital appreciation. While this strategy has proven valid over a long time horizon, the typically increased volatility in the short term can be problematic. If markets are down for a few years and significant withdrawals continue to occur, the fund may be further depleted, making it difficult to recover when markets rebound. Thus, investors who wish to adopt the risk of a higher equity exposure should keep aside a few years of income in cash or short-term investments so the equity holdings have time to rebound after a market decline.
In any event, the revised withdrawal schedule for RRIFs, which is noted at the right, will help to preserve the value of a RRIF, thus assisting in financing retirement for a longer period. As well, less income tax per year will be payable along the way as the lower RRIF payments will reduce overall annual income.
The quid pro quo is that upon the second death of a married or common-law couple, the full remaining value of a RRIF will be taxable in that final year. With the progressive nature of our tax system, this may create a significant tax liability at that time. The top marginal tax rate in B.C. is currently 48.5%; however, it will be decreased to 43.7% for 2016 and will apply to all taxable income over $150,000 in a given year. Some investors with additional assets such as non-registered holdings, or an investment corporation, may be better served from both an income stream and overall estate and tax planning point of view to continue to draw more funds than the required minimum from their RRIFs while preserving or growing the value of their other investment holdings.
A proper review of your overall financial position and income requirements will assist in making your financial planning choices. These two budget items will serve to assist in your deliberations.
The revised withdrawal schedule noted at the right will apply to your RRIF value on January 1 of the year when you reach the age shown in the table. You should also note that you can choose to use your spouse’s age in determining your RRIF withdrawal schedule.