Inkind Transfers To Meet Mandatory RIF Withdrawals

The average Canadian couple retires with approximately $800,000 in retirement savings. It is not uncommon for individuals to open RRIFs worth $450,000 upon retirement. For this reason, when I created an imaginary million dollar RRIF for an imaginary couple it was not an unreasonable amount.

RRSPs are designed for saving. At retirement RRSPs are converted into RRIFs structured to dole out the saved funds. The imaginary RRIF that I created is a self-directed portfolio of mainly dividend-paying stocks plus a smattering of ETFs. The imaginary RRIF Portfolio is posted here. Please, take a look.

If this had been a real portfolio, no withdrawals would have been made in the first weeks after its creation. Dividends must be given time to collect. Emulating reality, the first monthly withdrawal of $3,333.33 was made in August. By year end a total of $16,666.65 had been withdrawn. Despite the withdrawals, the portfolio value  grew to $1,042,126.11 by December 31st.

How did I choose a monthly withdrawal of $3,333.33? Four percent of a million is $40,000. Divide that by 12, for the 12 months in a year, and the result is $3,333.33.

With each passing year the minimum percentage that must be withdrawn grows. The mandated withdrawal for a 66-year-old retiree is 4.17%. This works out to a $43,456.66 withdrawal in 2024 calculated on the imaginary portfolio value of $1,042,126.11. 

I make my mandated withdrawals as in-kind withdrawals by tranferring stock from my RRIF to my TFSA. In the case of my imaginary portfolio, 1344 shares of Canadian Utilities (CU) at $32.33, plus $5.14 in cash is being transferred from the imaginary RRIF to a newly opened imaginary TFSA.

In the coming year, $2413.82 in CU dividends, which previously went to the RRIF, now go to the TFSA. These dividends can be withdrawn tax-free from the TFSA when needed. If there is not enough contribution room in the TFSA, the balance of the mandated withdrawal is transferred to a non-registered plan. This is the way I handle my own RRIF withdrawals. I try to live solely on the dividends.

A breakdown of the withdrawals, transfers and taxes follows:

• RIF value at market close on Dec. 31, 2023: $1,042,126.11
• Mandated withdrawal (4.17%) posted on Jan. 2nd by TD WebBroker: $43,456.66
• In-kind withdrawal (1344 CU shares @ $32.33+$5.14 in cash) to TFSA: $43,456.66
• No tax is withheld on mandated RRIF withdrawal but tax will be due in the following year.
• Tax, as much as 30%, is withheld on future withdrawals over the mandated minimum withdrawal.
  

To ensure there is no nasty income tax surprise in 2025, 30% is withheld from each monthly RRIF cash withdrawal to cover future tax demands . The cash withdrawals are made to provide the imaginary retired couple with the funds needed to live. As the RRIF is expected to yield at least $39,947 in dividends, payments of at least this amount should not be a burden. An estimated $11,984 will be withheld for future tax needs.

Thanks, in part, to the tax-free nature of the TFSA payments, more money is available for withdrawal per month in 2024 than in 2023. As dividends tend to increase annually, this is another reason the monthly payments will increase in the coming year.

I imagine you are wondering how much the imaginary portfolio is worth today, Jan. 5th, after all withdrawals have been made? Amazingly, it is worth more than its starting balance and don't forget that there is almost $40,000 in a TFSA as well.

My imaginary retired couple is very happy.

Click the link to see my next move: Next Move is to Diversify