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New tax rules for RRIF withdrawals |
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If you have a Registered Retirement Income Fund (RRIF), you should be aware of new tax rules that recently took effect. These rules mean the government could withhold more of your RRIF income as a "prepayment" of your yearly income tax bill.
Beginning January 1, the way in which withholding taxes-the portion of RRIF withdrawals the government deducts from certain RRIF payments-changed. The new rules affect only those who withdraw more than the required annual minimum from a RRIF each year.
Withholding taxes are now calculated on the total amount of excess payments for an entire year. This differs from the previous calculation, which was based on each individual payment (for example, monthly payments) through the year. As a result, withholding taxes will increase in some cases.
Withholding rates vary, depending on where you live. For non-Quebec residents, withholding tax is 10% on withdrawals of up to $5,000 over your yearly minimum requirement; 20% on $5,000.01 to $15,000; and 30% on $15,000.01 or more.
For residents of Quebec the rates are: 5% federal and 16% provincial withholding tax on amounts up to $5,000;10% plus 16% on $5,000.01 to $15,000; and 15% plus 16% on more than $15,000.
Here's how it works. Let's say you're required to withdraw $8,000 from your RRIF this year. But instead you decide to withdraw $15,000, in monthly payments of $1,250.
Your withholding tax will now be calculated on your excess amount for the year of $7,000. A withholding tax of 20% will apply (or more if you live in Quebec). Before the change, your withholding tax would have been based on the monthly amount of $1,250, which would have resulted in a lower withholding tax of 10%.
What constitutes a withdrawal above the minimum varies according to your age and the funds in your RRIF. Every RRIF holder is required to take out a minimum percentage of the assets in the RRIF each year. That percentage rises with age. For example, at age 65 you're required to withdraw 4% of the value of assets, at age 85 you must withdraw 10.33%. No withholding taxes apply to basic amounts-only to amounts over the yearly minimum.
And remember that withholding taxes do not represent your yearly tax bill. They're considered a prepayment of annual income taxes. Your taxes may be higher, depending on your income. In some cases, they could be lower-entitling you to a refund of part of the amount withheld.
If you're thinking of withdrawing more than the minimum from your RRIF, speak to your financial advisor about how it will affect your tax situation.
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