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RRIFs – act quickly to save on taxes this year

This year you may be able to save on your 2015 taxes by returning money to your Registered Retirement Income Fund (RRIF). Here’s how it works.

Income Tax Act amendment

Normally, every RRIF owner is required to receive a minimum annual amount, as determined under the Income Tax Act, beginning in the second calendar year of the RRIF (note that RRIF withdrawals are fully taxable). 

However, if you were born in 1943 or earlier and thus turned 71 or older in 2014, you have an added option for managing your taxes. Retroactive to January 1, 2015, the Income Tax Act was amended to reduce RRIF withdrawal minimums (for those born in 1943 or earlier) and allows those owners to re-contribute the difference between the original withdrawal minimums and the new reduced minimums.

Keep in mind that the deadline date for taking advantage of a re-contribution is Monday, February 29, 2016, so act quickly!

The new rules apply to all RRIFs, including spousal RRIFs and locked-in RRIFs such as LIFs, LRIFs, and PRIFs.

Here’s what you do

If you turned 71 or older in 2014 and want to pay the least taxes possible on your 2015 RRIF withdrawals, re-contribute the difference between your original 2015 minimum and the new reduced 2015 minimum. You can re-contribute this excess amount to any RRIF you own by the deadline date of February 29, 2016.

You will report the full amount withdrawn from your RRIF as income on your 2015 income tax return, and claim an offsetting tax deduction for the amount of your re-contribution. Note that the deduction will be claimed on Line 232 (other deductions on the federal T1 return and a similar deduction will be available on a Quebec return).

Here’s an example

Your original 2015 minimum RRIF withdrawal was $10,000 and your reduced 2015 minimum is $7,500.  You have already received the full $10,000 from you RRIF but you re-contribute $2,500 to your RRIF by the deadline date.  You will report the $10,000 withdrawn from your RRIF as income and claim a tax deduction for your $2,500 re-contribution.

The original annual RRIF withdrawal rate for someone who was born in 1942 and thus age 71 at the start of 2015 was 7.38%.  The reduced rate is 5.28% for a reduction in rate of 2.10%.  Withdrawal rates are age-related so check with your professional advisor to find the rate revisions that apply to you.

January 15, 2016

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.