How to strategize RRIF withdrawals when markets are down
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The sooner customers can withdraw from the RRIF, the less they will have to withdraw later.BrianAJackson/iStockPhoto/Getty Images
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Mandatory annual withdrawals from Registered Retirement Income Funds (RRIF) in a declining market can be difficult, but with a little planning, customers can easily pull through.
Daryl Diamond, Founder and Certified Financial Planner (CFP) at Diamond Retirement Planning Ltd. in Winnipeg, is happy to hold a certain amount of RRIF portfolio holdings in cash. He says that as both fixed income and stocks have been hit by volatile markets over the past year, clients now better understand the need to keep some cash in a higher-yielding savings vehicle within the RRIF.
“We try not to sell invested money when markets are falling, and we can do that through a cash-wedge strategy,” he says. “Depending on the client, we might have 12 to 36 months of cash so we don’t have to collapse investments.”
While he doesn’t want too much money, he does want the “literal dry powder” to draw from, he adds.
Laurie Stephenson, owner and CFP at Starboard Wealth Planners in Halifax, also has cash as part of RRIFs’ portfolios to mitigate down markets.
“It’s not just about having $50,000 in your bank account, it’s about actual liquidity in the portfolios,” she explains. “I like [clients with RRIFs] Having at least two years of cash so that when they go through a market phase where there is a significant drop, they can draw from something that hasn’t been impacted as badly.”
Then, when markets rise, she can take some assets off the top and put them in the cash portion of the portfolio, she adds.
“We do rebalancing on a regular basis,” says Ms. Stephenson.
Reinvestment “in the same investments”
Chris Ferris, CFP at Ryan Lamontagne Inc. in Ottawa, says customers’ options are limited when in mandatory withdrawal mode. If they don’t need the money to live on, he advises retirees to withdraw the entire amount at the end of the year because they’ll get an extra tax year of deferred dividends and interest.
“This is especially useful for people who really don’t need the money from the RRIF to make ends meet in retirement,” he says.
Mr. Ferris also notes that it is prudent to hold a cash reserve in an RRIF to minimize the risk of having to sell investments at a loss to meet withdrawal requirements.
Mr. Diamond has a different approach for those retirees who don’t need the mandatory payout amounts because they have other sources of income from occupational pensions and state entitlements such as the Canada Pension Plan and Old Age Security (OAS). For clients in these cases, the amount will be withdrawn but then reinvested in an unregistered account or tax-exempt savings account in the same investments, net of any taxes due.
“Just because you have to take the money out and are forced to sell low in bad markets doesn’t mean the money has to be there as cash or you have to spend it,” he says.
“If something is reinvested in the same investments, you help minimize the impact of the fact that we had to withdraw while the asset was down.”
Consider an early withdrawal
Mr. Ferris encourages clients not to wait until they are 71 to consider converting to an RRIF if they retire earlier. The sooner customers can withdraw from the RRIF, the less they have to withdraw later, he adds.
“It goes against traditional advice to defer taxes as much as possible,” he says. “But sometimes it makes sense to pay taxes earlier when you’re going to pay less of them.”
It all depends on the client’s current and future tax brackets and their other tax and investment situation, he adds.
He gives the example of a person who has retired early and registered Retirement Savings Plans (RRSPs) but does not yet need them for income.
“You can take advantage of early retirement and voluntarily withdraw any amount from your RRIF,” he notes. “As a result, the minimum withdrawals later are smaller than usual.”
Ms. Stephenson also encourages early RRSP/RRIF payouts to avoid future OAS clawbacks, which begin when net income reaches $81,761. One of her retired clients, mid-50s, has a large frozen retirement account. Ms Stephenson has advised withdrawing about $35,000 a year just to pay the minimum amount of taxes. Your current tax rate is very low.
“We know that later, when she starts getting her RRSP, she’ll be pushed into a much higher tax bracket,” she says. “Why not get the money out earlier and pay [the taxes] in the lower tax bracket?”
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