How increasing age limit could help employed retirees and clients with rental income
Advisors are welcoming the suggestion by industry groups that federal government raise the age at which RRSPs must be converted to RRIFs and reduce the annual RRIF minimum withdrawal rates.
“It would allow people to contribute to their RRSPs longer,” noted Kevin Hegedus, a portfolio manager with PWM Private Wealth Council with iA Private Wealth in Saskatoon.
“We’ve got an aging workforce, so we have more and more older people who want to stay in the workforce. This would allow them to continue to make those RSP contributions after age 71, so I think that would be a benefit.”
The Government of Canada’s finance department is studying RRIFs in response to a House of Commons motion. It has consulted with stakeholders and asked for submissions by March 23.
Its study resulted from the House of Commons adopting Liberal MP Kirsty Duncan’s motion last June. It asked the department to determine whether current RRIF rules reflect Canadians’ current income needs, and report back to the House of Commons by June.
Canadians now must transfer their RRSP savings to a RRIF by the end of the year they turn 71. Then, they must make withdrawals according to an annual minimum rate that is set according to their age.
Hegedus said raising the age limit to convert the funds would also allow older people to take advantage of their unused RRSP contribution room.
“They may have been paying off debt or helping family members, so they may have $20-30-50,000 of unused room to work with,” he said. “If the government raised the age to 75, they can actually use up that room when they have the funds because they may not have had that money earlier.”
The Conference of Advanced Life Underwriting suggested that Canadians be allowed to contribute to their RRPS until they’re 75 and also index the unused contribution room in their RRSPs. Allowing people to take full advantage of tax-free compounding in their RRSP would reduce the risk of them outliving their funds. It also recommended that RRIF holders be allowed to exclude up to $160,000, indexed to inflation, from the RRIF minimum payment formula until a RRIF holder turns 85.
The Investment Industry Association of Canada also recommended that the federal government raise the age at which contributions to RRSPs and other tax-deferred savings vehicles must end and eventually eliminate mandatory RRIF withdrawals since they can propel the recipient into a higher tax bracket if they’re also working. That way, they can manage their savings more tax effectively.
Hegedus said pushing the RRSP conversion back by an extra four years could also benefit retirees in two ways. First, if they have stopped working by then, they would have lower taxes. That would also help them avoid having an Old Age Security (OAS) clawback because “now you don’t have that extra income forced on you, which could potentially hurt you with an OAS clawback.”
Hegedus said he advises clients to start taking their money out of an RRSP as soon as they retire, particularly if they have a spouse, so they can split the income to take advantage of a lower tax bracket. If they don’t need the money, they – as well as singles - can redeploy it to a tax-free savings account which is more tax friendly than an RRSP.
Having more flexibility to plan their taxes for a longer period can also help clients who may not only have returned to work but those getting rental income.
“If they don’t need that income, they can push it off till age 75,” said Hegedus. “Maybe that will give them more time to do that tax planning around some of their passive assets, such as passing on their farm to their kids or grandkids or selling a piece of rental property. The more flexibility they have, the more planning tools they have.”