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. Instead of a payout of 7.31% at age 71 it will be 5.28%. The reduction in the rate is more than 28% initially going down to just over 20% after 10 years! You can see the impact on the charts in this post and try your own options with the downloadable spreadsheet.
The April 21 budget can be viewed and downloaded by going to Government of Canada Budget 2015. The section of interest for RRIF starts on page 242 and is titled “Reducing the Minimum Withdrawal Factors for Registered Retirement Income Funds”. Details are found in Annex 5, page 445 with Table A5.2 showing the existing and new payout percentages. When passed by parliament these rates will be used for the 2015 tax year onwards (i.e. it will be retroactive to the beginning of 2015).
In Annex 5 the rules used are intended to prove a regular stream of payments from age 71 to 100 with specific rates for interest and inflation. These are as follows:
– The new RRIF payouts have been set for a 5% nominal rate of return (or interest) on RRIF assets and inflation of 2% annually.
– This compares to the existing RRIF payouts that were set for a 7% nominal rate of return (or interest) on RRIF assets and inflation of 1% annually.
You can download a spreadsheet the only uses the 2015 rates by opening RRIF Minimum Payout – 2015 Rates and then downloading the spreadsheet included in the post.
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|
Comparison of Old and New Payouts
You can click on Download 2015 versus Old Rates Spreadsheet now and open it if you want to use it and make any changes from the values used below. The section for entering data has a place for starting capital, interest rate, tax rate, inflation rate and whether the payouts are to taken at the beginning or end of the year.
The 6 additional line charts included on the spreadsheet show results for both new and old payout percentages. The discussion below uses the following values: $100,000 RRIF at age 71, 5% return, marginal tax rate of 20%, inflation rate of 2% and payouts at the end of the year.
Payout & Available Amount
On Chart 2 (Available Amount) you can see that the new rates (the solid black line labeled 2015) result in a lower available amount until age 81 compared to the old percentages (the dashed black line labeled Old), when they are equal. Notice that the payout amounts using 2015 rates keep increasing until age 94, were as the amounts for the Old rates decrease each year.
Chart 2 also has the inflation-adjusted payouts for both 2015 and old rates. For the 2015 rates (solid blue line), the inflation-adjusted payouts stay reasonably constant until about age 84 and then drop slightly each year. This is the effect that the budget wanted. Compare this to the old rates (the dashed blue line) where the inflation-adjusted payout drops significantly each year. Even using a 1% inflation rate and an 7% interest rate (the planned values for the old rate) does not make the payouts constant for either no inflation or inflation-adjusted.
The actual payout amounts are not included on chart 2 as it would make the chart too busy. Instead, these are shown on Chart 7 (Payout Amount). Because the only difference between the Payout and Available amounts is the taxes, the above comments apply to chart 7.
Chart 3 shows the actual capital remaining at the end of each age. Chart 4 show the capital left as a %. With the old rates (the dashed blue and green lines) the capital decreases almost linearly until age 94 when it has reached 24% left. However, with the new 2015 rates (the solid blue and green lines), the capital decreases much less rapidly and is almost constant for the first few years. As a comparison, 50% of the capital is left at age 87 for the old rates but there is still 72% left with the 2015 rates. It takes until age 92 before 50% is left with the 2015 rates.
Difference in Capital
As shown in Charts 3 and 4 above, the capital left as a percent and actual value does not decrease linearly for the new percentages as does the old ones. It is obvious that the 2015 rates preserve capital, but how much is the difference?
Chart 5 shows the actual difference in capital between the old and new rates as a percent and as a $ amount. The $ Difference (the solid green line) shows that the 2015 rates are always more than the old rates with a peak of about $20K around age 85. The % Difference (the solid red line) can be a little confusing as it continues to rise each year to just over 50% at age 100. Keep in mind that the actual capital left is decreasing so you must refer to the $ Difference to see how much it is.
Cumulative Available Amount
There is one last chart to discuss. Chart 6 shows how much money is available after taxes from age 71 to age 100. The cumulative amount (use the axis on the left) is higher for the old rates (the dashed black line) up to age 93 compared to the 2015 rates (the solid black line. This is expected as the old rates are higher. However, at about age 92 the cumulative amount is greater for the 2015 rates. To show the actual difference at each age, refer to the orange line and the right axis. This shows that the old rate peaks at about $10K more at age 80 and then drops until at age 100 the 2015 rate has a cumulative amount of $12K more.
At the crossover age the cumulative available amount is about $144K. This value is almost half as much as the original $100K at age 71. That is, the government has taken its taxes, but you also get a lot back (after taxes) due to the tax sheltering the RRIF provides.
Try some yearly interest rates to see what happens. You will notice that it only takes a 3.3% interest rate to have a constant payout after taxes of about $5,280 ($4,200 after taxes) where as the old percentages started with a $7,380 payout ($5,900 after taxes) and decreased down to the same $5,280 at age 94. The capital remains the same for both with about $4K more for the new.