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Mandatory annual withdrawals from registered retirement income funds (RRIF) in a down market can be tricky, but with some planning, clients can ease through without issue.
Daryl Diamond, founder and certified financial planner (CFP) at Diamond Retirement Planning Ltd. in Winnipeg, likes to keep a dedicated amount of RRIF portfolio holdings in cash. He says with both fixed income and equities affected by volatile markets last year, clients now better understand the necessity of holding some cash in a higher-interest savings vehicle within the RRIF.
“We’re looking to not sell invested money when the markets happen to be down and we can do that through a cash wedge strategy,” he says. “We might have 12 to 36 months of cash, depending on the client, so we don’t have to collapse any investments.”
While he doesn’t want too much cash, he does want the “proverbial 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, but having actual liquidity in the portfolios,” she explains. “I like [clients with RRIFs] to have at least two years in cash so that if they go through a period in the market where there’s a significant drop, they can draw from something that’s not affected as much.”
Then, when markets are up, she can take some assets off the top and put that in the cash portion of the portfolio, she adds.
“We’re rebalancing on a regular basis,” Ms. Stephenson says.
Reinvesting ‘in the same investments’
Chris Ferris, CFP at Ryan Lamontagne Inc. in Ottawa, says clients’ options are limited when they’re 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 as they’ll receive an extra tax year of dividends and interest that have been deferred.
“That’s especially useful for people who really don’t need the money from the RRIF to make their ends meet in retirement,” he says.
Mr. Ferris also notes that it’s prudent to hold a cash reserve in a RRIF to minimize the risk of being forced to sell investments at a loss to meet withdrawal requirements.
Mr. Diamond has another approach for those retirees who don’t require the mandatory withdrawal amounts as they have other income sources from workplace pensions and government entitlements like Canada Pension Plan and Old Age Security (OAS). For clients in these cases, the amount is withdrawn but then reinvested in a non-registered account or tax free savings account in the same investments, minus the taxes due.
“Just because you have to take the money out and you’re forced to sell low in bad markets doesn’t mean the money has to sit as cash or you have to spend it,” he says.
“If any is reinvested in the same investments, you’re helping to minimize the impact of the fact we had to withdraw while the asset value was low.”
Consider withdrawing early
Mr. Ferris encourages clients not to wait until they’re 71 to consider converting to a RRIF if they’re retiring earlier than that. The sooner clients can withdraw from the RRIF, the less they will be required to withdraw later on, he adds.
“It’s counter to the traditional advice, which is always to tax defer as much as you can,” he says. “But sometimes it makes sense to pay taxes earlier if you’re going to pay less of them.”
It all depends on the client’s tax brackets now and in the future, and the rest of their tax and investment situation, he adds.
He cites the example of someone who has retired early and has registered retirement savings plans (RRSPs) but doesn’t need them yet for income.
“You can take advantage of early retirement and withdraw any amount from your RRIF voluntarily,” he notes. “This makes the minimum withdrawals later on smaller than they would be otherwise.”
Ms. Stephenson also encourages early RRSP/RRIF withdrawals to avoid future OAS clawbacks, which start when net income reaches $81,761. One of her retired clients in her mid-50s has a large locked-in retirement account. Ms. Stephenson has advised that she start withdrawing around $35,000 a year just to pay the minimum amount of taxes. Her current tax rate is very low.
“We know down the road when she starts drawing on her RRSP, it will push her into a much higher tax bracket,” she says. “Why not get that money out earlier and pay [the taxes] in the lower tax bracket?”
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