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RRIF relief can still be elusive for seniors

Globe and Mail Update

Seniors with hard-hit retirement savings got some modest relief from Ottawa last month, but the country's financial institutions are having trouble delivering it.

The Conservative government announced in its Nov. 27 economic update that seniors would get a 25-per-cent reduction in the minimum amount of money they must withdraw from their registered retirement income funds (RRIF) for 2008. Problem is, some financial companies have told people they're unable to process requests to make the reduced minimum RRIF withdrawal.

“People can't get the 25-per-cent discount,” said Susan Eng, a spokeswoman for the national seniors group CARP.

The problem is that the computer systems used by financial companies can't quickly be adjusted to allow people to make 75 per cent of their usual minimum RRIF withdrawal, said Sandy Cardy, senior vice-president of tax and estate planning at the mutual fund company Mackenzie Financial.

“The problem is with financial institutions,” Ms. Cardy said. “To amend a system isn't something that can be done overnight.”

As of late yesterday, Mackenzie and Royal Bank of Canada were among the financial institutions that were allowing clients to do 75-per-cent RRIF withdrawals, while Bank of Montreal said it could do so for accounts held in mutual funds and term deposits. But Ms. Cardy said she had earlier run into a problem helping her 85-year-old mother take advantage of the federal government's RRIF measure.

All is not lost for seniors if their bank or investment dealer can't accommodate a reduced RRIF withdrawal for 2008. People who make the full withdrawal for this year will have the opportunity to put 25 per cent of the amount back into their RRIFs until March 1, 2009, or 30 days after the government's RRIF measure is passed into law.

Meantime, seniors should know that the political uncertainty in Ottawa has no impact on their ability to take advantage of the reduced RRIF withdrawal amount. Ms. Cardy said it's standard practice for financial institutions to be allowed by the Canada Revenue Agency (CRA) to act upon tax-related measures in a budget or economic update that have yet to be passed into law, and the agency has confirmed as much with the RRIF changes.

And what happens if the government falls after Parliament resumes next month and the RRIF legislation dies? CRA says on its website that people who made a reduced RRIF withdrawal could be required to top up that amount, although no penalties would apply.

Many seniors make monthly withdrawals from their RRIFs and thus will have already taken out close to the usual required minimum amount. At very least, they may be able to have their December RRIF withdrawal reduced by up to 25 per cent.

Others may be preparing to make their 2008 withdrawal in a lump sum and hoping to take advantage of the 25-per-cent reduction. If your financial institution can't oblige, you may have to do two RRIF transactions – one immediately to take out the normal minimum amount, and another later on to put back the 25-per-cent excess withdrawal. There are some complications in doing this, one being the added stress on seniors.

“First of all, many people get rattled in these big, fancy financial institutions,” CARP's Ms. Eng said. “Plus, this is the time that advisers take the time to sell them something else. Plus, seniors are already extremely anxious.”

Another issue raised by Ms. Eng is that seniors must pay tax on the full withdrawal amount, even if they plan to put 25 per cent of it back into the plan later.

Still another problem with putting money back into a RRIF is the risk that the stock market jumps in the weeks ahead. If that happened, a senior could be put in the position of selling a beaten-down investment now at a low price to fund a RRIF withdrawal and then reinvesting the money back into the plan later, when the markets are higher.

A way to avoid this is to make an “in-kind” withdrawal from a RRIF, which means transferring securities out of the plan and putting them in a regular non-registered investment account. The transfer is considered a taxable transaction, but the securities are left intact to potentially rebound from the stock market decline.

Later on, when it's time to again contribute some money to your RRIF, Ms. Cardy said you should be able to move securities back into the plan from your non-registered account.

She argues that there's a positive side to making the full RRIF withdrawal this year and not taking advantage of the 25-per-cent break.

By taking more money out of the RRIF right now, you lower the value of the account that will be used to set the 2009 minimum withdrawal.

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