The Conservative government made a number of savings-related changes while they were in office and while Justin Trudeau may do away with some of them—the TFSA contribution limit, for instance—one rule he likely won’t alter is the new minimum RRIF withdrawal limits.

Starting this year, 71-year-olds will be forced to withdraw 5.28% of their assets from their RRIFs, down from 7.38%. While that gives retirees more flexibility in how they can use their savings, it also alters their estate planning requirements.

If someone sticks to the new annual minimum withdrawal limits and passes away before his RRIF empties, he could be leaving a much larger estate than he would have under the old rules. According to the government, under the new rules a 90-year-old will have 50% more capital than he would have with the old rates.

That’s good news for the elderly Canadian who needs money to live on, but removing such a large chunk of assets upon death will likely result in a tax hit at the highest marginal rate, says Jason Pereira, a partner and senior financial consultant at Woodgate Financial.

Unfortunately, it’s impossible to get around taxation on a RRIF, he says. When a client passes away, the government will go after its share of those assets, no matter what. The goal then would be to minimize the tax hit while the person is alive.

Check the Bracket

Should a client take out more money earlier or stick to the new minimums? That’s the main question advisors will be asking themselves, and the answer depends on the retiree’s income level between 65 and 71.

If someone will be in the highest tax bracket during her 60s, then it doesn’t make much of a difference as to when she pulls the money out, says Ben Felix, an investment advisor with PWL Capital.

However, if her tax rate is lower than the highest marginal rate, she should start removing money from the account earlier, he says. Those who don’t need the money to live on could then invest those dollars in a TFSA, where it can continue to grow tax-free.

Watch out for OAS

If Old Age Security payments didn’t exist, there would be only one thing to do: pull the money out early. However, those payments are important to most retirees and as soon as a client claims $72,000 in income, those payments are clawed back.

“A lot of people run into problems with OAS due to the RRIF minimum,” says Felix. “So you might want to leave more in there to avoid the clawback.”

Pereira suggests taking the money a client would remove at 71 and spreading that withdrawal out over the preceding six years. The client would end up paying less tax on those payments per year and would still receive OAS payments too.

Overfunding Insurance

Many people will want to put those withdrawn dollars into their TFSAs, but clients can shelter only so much money in that account. Some people might want to consider overfunding a universal life policy instead.

While there is a limit on how much one can overfund a policy—it’s based on a number of different calculations—the limit is a lot higher than what can be deposited in a TFSA, says Pereira.

The money can’t be withdrawn, but it is invested in the market and paid out on death. That money can then be used to pay any taxes on the RRIF.

It’s not completely free of fees on withdrawal, but it’s not taxed and any costs associated with the policy are a lot less than what one would pay by keeping those dollars in the RRIF or moving them into a non-registered account, says Pereira.

While tax can’t be avoided, it is possible to reduce the amount one pays throughout his or her lifetime, says Pereira, and that’s what RRIF-related estate planning should focus on.

Yes, people may have a larger estate upon death now, but that doesn’t mean the new minimum withdrawal rules are a bad thing.

“This gives people more options,” says Pereira. “And options aren’t bad.”

Bryan Borzykowski is a Toronto-based business journalist. He writes for the New York Times, CNBC, CNNMoney, Canadian Business and the Globe and Mail, among other publications. He’s also written three personal finance books published by John Wiley & Sons. Follow him on Twitter @bborzyko.
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