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.
Conclusions
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.
14 replies on “CARP Is Full Of CRAP”
When people or an organization sense “opportunity” they’re always going to try and make private ideas public policy.
Thanks for the primer though – good work.
I don’t know anything about CARP, but I guess they’re mostly made up of wealthier retirees? Old people vote and organize and engage with politicians regularly and reliably. In Ireland, they just got a budget change to means test medical cards for the elderly overturned through a pretty impressive display of grey power. It’s hard for me to begrudge them pushing their issues. Us younger people should get our arses in gear and do the same. Posts like this one are a decent contribution to that.
Indeed they are, and this is exactly the type of information that both seniors and the general voting public needs to know.
I can appreciate the role of lobbyist groups, but citizens need to be able to “call BS” when it’s the case. Thank you for doing just that.
Not to mention: If I am “forced” to withdraw X dollars from a RRIF during a down market, I pay tax on $X. If I withdraw in-kind and leave the investment to rebound, the capital gains will only be taxed at half the usual rate. If I did not have to withdraw those dollars now, they’d grow inside the RRIF and I’d have to pay full tax on all of it when it comes out. So isn’t it more desirable to withdraw in-kind during down markets than up?
Good points! My parents are going to have to start mandatory withdrawals soon, and they’re been happy to put it off as long as possible… I guess its no fun being hit with a tax bill for money you don’t need.
Brad – thanks.
Guinness – you’re right. I don’t mind any special interest groups pushing their own agenda – my point is that they shouldn’t use logic that doesn’t make any sense.
Charles – that’s not the way it works. An in-kind transfer out of a RRIF is the same as a normal withdrawal for tax purposes. If you do the in-kind transfer into an open account then your ACB will be set to whatever the market value of the securities is on the day of the transfer and the market value of the securities will be added to your taxable income.
Cheap – someone has to pay taxes! 🙂 Another point which is related to #3 is that proper financial planning has to come into play. If I have money I don’t need when I’m retired then I’m going to regret the fact that I saved too much.
Mike
Jon Chevreau posted Finance Minister Jim Flaherty’s response which is along the lines you’ve pointed out. RRIF withdrawal rules have been around for a while and investors should plan around that by having low-risk assets like cash and bonds to meet tax obligations.
Mike, there was an interesting article in the Globe and Mail today about RRIFs and mandatory withdrawals- http://www.theglobeandmail.com/servlet/story/LAC.20081105.COPENSION05/TPStory/?query=rrif
The author suggests that the mandatory withdrawal age should be pushed back to let people continue to make tax deferred contributions even longer. It’s a little more nuanced of an approach than that taken by CARP, but the points you make above are equally applicable. Losing the ability to make tax-deferred contributions doesn’t affect seniors’ abilities to continue to save in any way.
Ram – thanks for mentioning the Chevreau article. Looks like Jimmy and I are on the same page. CARPs response to it is still ridiculous – they are assuming the “78 year old” is 100% invested in equities and won’t spend the withdrawal. If she doesn’t need the money then why does it matter if the portfolio depletes before she does? Why didn’t she spend it when she was young?
MGL – thanks for that article. Looks like my timing for this post was accidentally quite good.
I will say that one point which does have some validity is the fact that in a market crash you are withdrawing a percentage amount of the account balance as of the beginning of the year which doesn’t seem fair except for the fact that in an ‘up’ year, you are also withdrawing a percentage of the beginning of the year balance which results in a smaller percentage amount. I should do another post on this.
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One thing that would be beneficial to pensioners is to tax RSP withdrawals at a lower rate or a “fixed” rate. It hardly seems fair to tax mandatory withdrawals at a progressive tax rate when pensioners are now collecting OAS, CPP and possibly a company pension and now mandatory withdrawals are lumped on top of that.
You claim in your post that equities in a RRIF can be moved to a TFSA with an ‘in-kind’ transfer. If you have 5 shares of Bank of Montreal in your RRIF account, you can transfer those 5 shares to your TFSA, you say. The fair market value at the time of the in-kind transfer is noted and that amount is added to one’s income for the year.
Although Revenue Canada agrees with you, many, possibly all, the Canadian banks do not. These banks insist in making these transactions in two steps: first, the stock is removed from the RIF, valued for taxation purposes and placed in a non-registered account held by the owner of the RIF account. Then the equities are moved from the non-registered account into the TFSA.
For example, a stock valued at 35-cents a share could climb to 45-cents a share by the time it is deposited in the TFSA. The retiree owes taxes on FMV calculated when the equities were transferred out of the RIF AND the retiree owes capital gains tax on the growth of the FMV while being transferred — a tax on a gain of almost 30%.
As a retiree forced to deal with the banks, I deal with two, I can assure you the rules as applied are murky and can vary from bank to bank. And this is not this is not grumbling from a rich senior but from a fellow forced to take early retirement and about a 25% cut in company pension and CPP payments.
As Finance Minister Jim Flaherty wrote in his famous open letter “there may be obstacles to in-kind asset transfers within financial institutions. It has also been suggested that some financial institutions may not be advising clients of this option where it does exist.”
You may not agree with CARP. That’s you right. But, and it is a big but, CARP understands the problems associated with the present application of RIF rules. It has been about seven years since the late Jim Flaherty made his public request that in-kind asset transfers between RRIFs and other accounts be made possible at no cost to the client. I have not found a lot has changed in this area in the intervening years.
This is an add to my comment appearing above.
Both Scotia iTrade and TD WebBroker now agree that equities removed in-kind from a RIF can end up in a TFSA but they differ in how they achieve this. The Scotia people insist that I open an iTrade cash account and deposit the in-kind transfer there temporarily. Then the in-kind equities are moved from the non-registered cash account to the TFSA. People in government warn me that this is needlessly complex and could result in the FMV being changed. If possible, don’t do this, I’ve been told. The parking, even momentarily in a cash account, adds a wrinkle that should not be there. I am transferring all my funds to the TD. Their internal, kept at arms length, method of calculating the FMV, assessing the appropriate income tax, and moving the investments seems superior to the Scotia iTrade approach. (I have used the names of the banks since I have now confirmed all that I am reporting.) — Cheers!