One of the disadvantages of registered retirement income funds is that RRIF-holders must withdraw income every year at a minimum rate based on their age, not on need or the performance of the investment portfolio.

The required minimum annual withdrawal rates set by the Income Tax Act may represent more than your client would like to take out. But if the client has a younger spouse, the minimum withdrawals can be based on the spouse’s age, leaving more assets in the RRIF to grow on a tax-deferred basis.

“If the client does not need to withdraw the minimum amount based on his or her own age, I would absolutely recommend the strategy of basing withdrawals on the age of the younger spouse,” says Kerry Cockriell, certified financial planner with Toronto-based GP Wealth Management Corp. “You want to be as tax-savvy as possible, and this leaves more in the RRIF to grow. The RRIF will last longer, and there’s less danger of it running out prematurely.”

Although a RRIF can be opened earlier, the Income Tax Act requires that a client’s RRIF be opened no later than in the year in which the client turns 71, with minimum annual withdrawals commencing the following year. If the client is 71 on Jan. 1 of that year, the minimum annual withdrawal rate is 7.38% of the RRIF balance at the beginning of the year.

This rate rises every year, to 8.99% at age 81, 14.73% at 91 and 20% at age 94 and beyond. There is no maximum limit on RRIF withdrawals as long as the plan is not “locked in” because of a transfer of assets from a pension plan.

“Every year, whether they need it or not, clients must take out an increasing amount of money,” says Tina Tehranchian, certified financial planner and branch manager in Richmond Hill, Ont., with Toronto-based Assante Capital Management Ltd. “Basing the payment on the age of a younger spouse builds flexibility.”@page_break@A reduced withdrawal is often more comfortable during times when the rate of return on the assets inside the RRIF is low or negative. Depending on the age of the younger spouse, the withdrawal amount can be reduced considerably using this strategy.

If the spouse’s age is 60, the minimum withdrawal rate can be reduced to 3.33%; if the spouse is 50, the reduced rate is only 2.5%. For example, for a $500,000 RRIF, a 71-year-old would have to withdraw $36,900 in the first year, based on their age. If the client had a 50-year old spouse, only $12,500 would have to be withdrawn.

“There’s no real downside to a lower minimum,” says Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc. “It’s best to set the RRIF up with the lowest possible threshold for required withdrawals. I would recommend the strategy to anyone with a younger spouse.”

Long-range projections have shown that safe withdrawal rates for seniors who do not wish to outlive their retirement nest eggs are typically in the range of 4% a year. However, the rules force seniors to withdraw almost twice that amount from their RRIFs in the early years, with the amount increasingly rapidly. In a year such as 2008, which saw painful declines in equities markets around the world, such large, taxable withdrawals are even more painful.

“Withdrawal rates are high and, depending on the rate of return in the RRIF, can eat into capital quickly,” says Rob Whipp, president of Toronto-based Fiscal Agents Ltd. “If the RRIF income is not a requirement, some people are burdened by being forced to take it at the prescribed levels,” he notes.

With a lower minimum rate, clients could withdraw the prescribed amount from the RRIF and still have the flexibility to take out as much as desired in fat years, when the portfolio has seen generous gains. When markets are down, the client could choose to leave more in the RIFF.

If basing withdrawals on the spouse’s age was not done when the RRIF was opened, the assets can be transferred to a new RRIF with withdrawals based on the younger spouse’s age.

IE