CARP for those of you who don’t know is a Canadian organization of retirees which pushes for various government policy changes on behalf of Canadian retirees. One of their recent public campaigns has been a call to the Canadian government to reduce or eliminate mandatory withdrawals from RRIF (registered retirement income fund) accounts on the basis that:
- The mandatory withdrawal amounts are too high and retirees will outlive their money.
- Cashing in their retirement investments when the market has crashed will result in very poor portfolio performance and…you guessed it – retirees outliving their money.
According to their spokesperson Susan Eng, it is an “It’s become an absolute emergency“.
First of all – a brief primer on RRIF accounts:
RRIF accounts – what are they?
RRIF accounts are the things that your RRSP will turn into when you turn 71. RRIFs are tax-sheltered accounts but unlike RRSPs, once you turn 72 there is a RRIF mandatory withdrawal amount each year. The amounts start at about 7% and go up from there. The withdrawal amounts are added to your taxable income in the year of the withdrawal.
The issue that some people have is that they sometimes don’t want to take the minimum amount out each year because they don’t need it or they want it to be part of their estate.
Why CARP is full of CRAP
The first argument CARP has had for a while (mandatory withdrawal amounts are too high). They say that the 7%+ withdrawal is higher than what retirees can earn on fixed income investments. The second argument which kind of contradicts the first is that seniors shouldn’t be forced to sell equities in a down market.
My response is as follows:
- Regardless of how much money retirees are “forced” to withdraw from their RRIF accounts – they don’t have to spend any of it. Yes, the withdrawal is taxed (like a withdrawal from an RRSP) but the retiree is perfectly capable of putting the money into a TFSA or a taxable account for a rainy day or to leave in an estate.
- Equities do not have to be sold when withdrawing from a RRIF account. If you have investments (mutual funds, stocks etc) in a registered account such as a RRIF or RRSP and you want to move them to a TFSA or taxable account – you can do this with an ‘in-kind’ transfer which means that the securities just move from one account to another. If you have 5 shares of Bank of Montreal in your RRIF account then you can transfer the 5 shares to your open account and you don’t have to sell anything. You are still making a withdrawal which is taxable but you haven’t sold a thing.
- RRIF accounts weren’t born yesterday. When you put money into an RRSP – you defer income taxes. When you take the money out of the RRSP you pay taxes. If you leave your RRSP money long enough then eventually it will have to be converted to a RRIF account which is subject to mandatory withdrawals at age 72. Those are the rules – if you don’t feel the RRSP/RRIF combination is “fair” then don’t use them.
CARP seems to able to spend a lot of money putting the word out that RRIF minimum withdrawals are an ‘emergency’ when it is quite obvious to me that most retirees have a lot more things to worry about then being forced to withdraw retirement funds that they don’t need. If I was a member of CARP then I would be questioning why they aren’t putting their resources into helping the majority of retirees rather than the very few who have RRIF money they don’t need.