Front End Load: Reconsider the rules

The current federal tax policy that requires seniors to make minimum withdrawals from registered retirement income Funds (RRIFs) no longer makes sense in an environment of increased longevity risk and low interest rates, a study released by the C.D. Howe Institute argues.

Currently, after canadians reach age 71, they must transfer their RRSP assets into a RRIF or annuity. the income tax Act requires RRIF holders to withdraw a minimum of 4% of the beginning-of-year balance at age 71, then an escalating minimum until, from 94 onward, they must withdraw 20% of their balance each year. of course, all of these are taxed at the retiree’s marginal rate.

According to the C.D. Howe Institute, the minimum withdrawal regulations made sense when they were put in place in 1992, given the nature of financial markets then. the current life expectancy of those approaching retirement is substantially higher now than it was 16 years ago, and the rate of return on fixed income is drastically lower. the traditional conservative investment portfolio of today’s retiree is at risk of being depleted at a faster rate.

C.D. Howe emphasizes roughly half of today’s 65-year-old men will live past 2025, making it more likely they will outlive their savings if the minimum withdrawal requirement is left in place.