“The re-contribution must be made before March 1, 2016”
Generally, on the last day of the year in which you turn 71, your registered retirement savings plan (RRSP) matures and you can do any combination of the following three actions:
- withdraw some or all of the RRSP funds (in which case the amount is fully taxable)
- transfer funds, tax free, to a registered retirement income fund (RRIF), or
- use finds to purchase a life annuity.
A RRIF allows income to continue to accumulate, tax free, and is the most common method people use to, essentially, convert their RRSP’s into “pensions”. Unlike RRSP’s however, minimum annual withdrawals are required to be taken from a RRIF based on a schedule in the Income Tax Act (the Act). For example, the schedule in the Act requires a minimum of 7.38% of the beginning of the year value of the RRIF to be withdrawn each year. This minimum increases annually and, at age 85, 10.33% of the beginning of the year value must be withdrawn. These required minimum withdrawals may be too high. Why? Because investment returns are at record lows and, with life expectancy increasing, people need their RRIFs to last longer.
In order to recognize this problem, for 2015 and later years, the minimum amount that must be withdrawn from a RRIF for a holder who is 71 to 94 years old has been reduced from 7.38% to 5.28%.
Many people have already withdrawn their 7.38% for 2015. If this was more than desired, the excess above 5.28% can be re-contributed to the RRIF. The re-contribution must be made before March 1, 2016, and will be deductible when calculating the holder’s income for the 2015 tax year.
Moreover, a re-contribution made in 2016 will not affect the minimum amount for 2016. The minimum amount for 2016 will be based on the fair market value of the RRIF property at the beginning of 2016.
If you have excess RRIF withdrawals (above 5.28%) that you don’t need, you should consider re-contributing the excess. It may be worth waiting until after January 1, 2016 (but before March 1, 2016) to re-contribute the 2015 excess. Since the 2016 minimum will be based on the value in the RRIF at the beginning of 2016, deferring the re-contribution until after the start of 2016 will ensure that your 2016 minimum withdrawal is based on the lower principal balance at January 1, 2016.
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