Back in March, the Canadian and U.S. governments announced a wide array of financial relief measures in response to Covid-19. A subset of these measures is aimed at helping seniors who hold individual retirement plans. The U.S. also provided a relief measure available to younger owners of retirement plans.
Those who hold both Canadian and U.S. retirement plans are eligible for the relief measures on both sides of the border. As we’ll see, the U.S. measures are both more generous and more flexible than what the Canadian government provided.
Canada’s RRIF relief
The Canadian government provided a 25% reduction to the RRIF minimum required withdrawal amount in 2020. The amount is based on the account holder’s age and the RRIF value at the start of the year. Someone who was 78 on Jan. 1, for example, will only be required to withdraw 4.77% of the Jan. 1 RRIF balance this year, instead of the regular 6.36%.
Unfortunately, RRIF holders who’ve already withdrawn an amount in 2020 greater than the newly reduced amount aren’t permitted to recontribute the excess back into their RRIFs. Also, Canada hasn’t introduced any special withdrawal provisions for those who have been affected by the coronavirus.
U.S. relief for retirement plans
The Coronavirus Aid, Relief and Economic Stimulus (CARES) Act doesn’t merely reduce required minimum distributions (RMDs) for holders of U.S. individual retirement accounts (IRAs) and 401(k)s for 2020—it eliminates them entirely.
RMDs in the U.S. are based on the age the retirement account holder will turn in the current year and the account value at the end of the previous year. An unmarried U.S. retirement account holder turning 78 in 2020, for example, can choose to forgo the withdrawal of 4.93% of the Dec. 31, 2019 value that they otherwise would have had to make.
Canada’s forced depletion schedule for RRIFs is faster than the U.S. forced depletion schedule for IRAs and 401(k)s, with greater required annual withdrawals at almost every age in Canada. Therefore, calling the 100% RMD waiver for 2020 in the U.S. four times as generous as the Canadian 25% RRIF reduction isn’t strictly accurate as the comparison isn’t apples to apples.
Still, the difference in long-term financial impact between the two countries’ measures is significant. Let’s assume a 5% growth rate and compare the following examples.
First, consider Eli, a Canadian who was 78 on Jan. 1 with a RRIF worth $1 million on that date. Eli takes advantage of the 25% minimum withdrawal reduction in 2020 and adheres to the minimum withdrawal schedule in future years. After 10 years, he would have roughly $12,000 more in his RRIF than he would have without the reduced withdrawal rate for 2020.
By contrast, take Courtney, an American turning 78 in 2020 with an IRA worth $1 million on Dec. 31. She forgoes the RMD in 2020 and adheres to the RMD schedule in future years. Ten years later, Courtney would have roughly $43,000 more in her IRA.
For Canadian RRIF owners thinking of moving to the U.S., taking advantage of the 25% relief measure can lead to future tax savings by leaving more money in the RRIF to come out at a much lower tax rate: non-residents of the U.S. can withdraw RRIF funds at reduced non-resident tax rates as low as 15%, as opposed to Canadian residents who face tax rates as high as 53% on RRIF withdrawals.
More flexibility with the U.S. relief measures
The 2020 U.S. RMD waiver also allows for more flexibility than the Canadian 25% reduction. In general, U.S. retirement account holders have a 60-day rollover window to recontribute withdrawn funds back into their retirement accounts. As a relief measure, the IRS extended the deadline of this rollover window to Aug. 31 to recontribute any RMDs taken in 2020.
The U.S. CARES Act also allows retirement account holders of any age to take coronavirus-related distributions (CRDs). Eligible individuals — including those who were diagnosed with Covid-19, those whose spouses or dependents were diagnosed with Covid-19, or those who experienced financial hardship from the pandemic — are permitted to withdraw up to US$100,000 from their U.S. retirement plan and have it characterized as a CRD.
The income tax owing on the withdrawal can be spread out over three tax years and the 10% penalty that otherwise applies when withdrawals are made before age 59-and-a-half doesn’t apply. If the withdrawn amount is recontributed back into the retirement plan within three years, the tax liability that arose from the original withdrawal(s) is refundable via the amendment of the prior tax returns.
Canadian and U.S. government relief measures allow retirees in both countries to keep more money in their retirement plans this year, provided they have other sources of income and don’t need the required withdrawal amount for cash flow purposes. The U.S. measure is far more generous, however.
Slowing down the forced depletion of a retirement plan is financially beneficial for those who don’t need the money, but providing easier access to withdraw the funds may not be. While the CRD measure is a welcome source of added flexibility for U.S. retirement account holders who were affected by Covid-19, the provision should only be used as a last resort: it’s generally preferable to draw on cash reserves from an emergency fund or other taxable accounts before drawing on retirement funds due to the lost tax-deferred growth on withdrawn retirement funds.
That said, for those without other sources of capital to drawn on, the CRD relief may be a valuable lifeline.
Jonah Ravel, B.A., F.Pl., CFP, is a senior cross-border financial planner at MCA Cross Border Advisors Inc.