In the 2015 Federal Budget, the minimum payout rates for Registered Retirement Income Funds (RRIF) have been reduced significantly so that capital can be preserved for a longer period of time. This post updates a previous one that uses the old rates. An updated spreadsheet can be downloaded that provides tables and charts that show the impact on capital of the minimum payout for different starting RRIF capital, interest rate and marginal tax rate and includes the impact inflation.
The previous post RRIF Minimum Payout uses the old values and includes a spreadsheet that can be downloaded. Rather than you having to go back to that post, all of the text is given below, a new section has been added and a new spreadsheet is available.
Comparison of Old and New Payouts
A separate post has been prepared with its own spreadsheet that compares the new 2015 payouts with the old values. It shows the changes to the payouts and capital that result from the lower minimum rates that are to be used from 2015 onwards. If you are interested in a more detailed look at the impact than is given in the budget, newspaper articles and the many blogs that just reiterate what is in the budget, click on RRIF Minimum Payout – 2015 versus Old Rates.
A Registered Retirement Income Fund (RRIF) is required when you have funds in an RRSP (Registered Retirement Savings Plan), a RPP (Registered Pension Plan) or a SPP (Simplified Pension Plan) and you reach 71 years of age. These pension plan funds must be converted to a RRIF or else the plan’s funds are included as income in the year.
To recover the tax refunds that you received when you or your employer provide funds into the RRSP, RPP or SPP during your working years, the Government of Canada requires a minimum payout each year. This payout is calculated at the beginning of each year and normally reduces the capital remaining in the RRIF. The amount left at any age depends on the interest rate.
This payout is fully taxed as income. The minimum RRIF payout applies for your entire life and is calculated each year on the value of your RRIF on December 31 of the previous year.
You can elect to receive the payout any time during the year, such as monthly, quarterly or semi-annually. If you do not need the funds during the year, most financial institutions recommend December 15 as an appropriate payout date to ensure that year-end activities do not delay the payment.
Minimum Mandatory Payouts Percentages
You can create a RRIF earlier than 71. In this case, the minimum payout factor is based on your age as follows: 1 / (90 – age when you take out the RRIF). For example, if you want to start a RRIF at age 65, the payout would be 1/(90-65) = 1/25 = .04 or 4%.
Once you reach 71, the minimum mandatory payout is given as a percent and it changes each year. The values from the budget for 2015 and onward and the old payout percentages are given below with the last column being the change in payout as a percent. Notice that the 2015 payout is always less than the old payout for any age, except after age 94 when both are 20%.
|Age||Old Payout %||2015 Payout %||% Change|
You can download an Excel spreadsheet where you can enter your RRIF value at age 71, the interest rate and the marginal tax rate. Please click on Download Spreadsheet now and open it if you want to use it and make the changes indicated below. (The marginal tax rates by province, including the federal component, are available in the Canadian Marginal Tax Rates post.) The spreadsheet provides charts of the remaining capital each year and the minimum payout in dollars. Enter some of your values and see what happens. The values that you can enter are given below:
Changes Since the Previous Post
Changes have been made to the spreadsheet that provide a few more options and comparisons.
1) You can decide to take the RRIF payout at the beginning of the year or at the end of the year. The former was the default before. The impact can be significant in later years.
2) The rate of inflation as a percent has been added.
3) Inflation is calculated at the end of each year.
Using the 2015 payout values, for a $100,000 RRIF at age 71, a 5% return, a marginal tax rate of 20%, a 2% inflation rate and payouts at the end of the year, the payout (dashed purple line labeled “Payout” on chart 2) goes from $5,280 at the end of age 71 to $8,320 at age 94. There is still 38% of the capital left at age 94. (The impact of taking the payouts at the start of the year is significant in that it is reduced to $7,514 at age 94 and there is 34% of the capital left at age 94. This is not shown on the charts.)
Note that the Payout after tax (shown as the thick black line labeled “Avail” on Chart 2) tracks the Payout line but is much lower and goes from $4,424 to $6,011 at age 94.
The inflation-adjusted payout is shown as the dashed blue (“Infl Payout” on Chart 2) and the inflation-adjusted available payout is the solid blue line (“Infl Avail” on Chart 2). According to the budget, the new 2015 rates where set to provide constant payouts with inflation at 2%. However, as shown with the blue lines, inflation-adjusted payouts are not constant for much more than 10 years then drop off. However, the actual payouts continue to increase each year to age 94 when the 20% rate kicks in and payouts decline each year.
Of interest on the two capital charts (3 and 4) is that actual capital does not decrease very much for the first 10 years, only losing 11% by age 81 or 14% when payouts are taken at the start of the year. Using the old rates, the loss was 32%.
Hints: If you download and open the spreadsheet, you can view the actual value of each point on any of the lines on the graphs by hovering over the line. Excel will then show the Series “name”, the Point “age” and Value “$ or %”. If you want to see the data used in the charts and the formulas used, unfreeze the panes or expand the window and scroll down to see the tables. If you click on any line on a chart, the areas used will be highlighted in the tables.
Observation – Constant Payout
There are some interesting observations that can be made. Specifically, with a 3.1% interest rate, the actual payout is within a few dollars of being constant up to age 94 and capital goes down to 24% of the starting value. Of course the inflation-adjusted payout drops each year. This is true no matter the value of the marginal tax. The payout percentage is the value for age 71 which is 5.28% of the initial capital. The Available amount is this amount less the taxes. That is, for the example of $100,000, and 3.1% interest, the payout is $5,280. This example shows that you can maintain a constant payout without having to take risks to get a greater yearly interest.
On the other hand, if you want to have a constant inflation-adjusted payout up to at least age 84, you need a yearly interest of just under 6%. Try it yourself on the spreadsheet and see what happens to the capital and the actual payout.