The stock market rally puts seniors making year-end RRIF withdrawals in a good spot

Waiting until late in the year to make your annual RRIF withdrawal has never looked better than it does in 2020.

With the stock markets crashing back in March, the federal government reduced the required minimum withdrawal from registered retirement incomes funds for 2020 by 25 per cent. The point was to lessen the pain for retirees who had to cash in hard-hit stocks and equity funds to cover their RRIF withdrawal amount.

What happened next was a massive stock market rally that has only gained momentum lately because of optimism that new vaccines will end the pandemic. Now is actually an awesome time to sell something in your RRIF to fund your reduced withdrawal amount. You’re basically taking profits, a sensible thing to do just now. If your stocks have run ahead of your bond holdings, you’re rebalancing your portfolio to return to your target asset mix.

I heard in the spring from quite a few seniors who were unnerved about having to sell investments in their RRIF after the March market plunge that, at worst, saw the S&P/TSX composite index down by about 37 per cent. Reducing the required minimum withdrawal didn’t eliminate their anxiety, but it helped.

The stock market rally offers a lesson in not panicking or making spur of the moment investing decisions after a big market decline. Granted, the rebound from the market crash was unusually quick and decisive. But the crash itself happened in a sped up way, with investors panicking as the pandemic advanced globally. Government financial supports and low interest rates helped stocks start climbing again.

The events of 2020 in stocks also highlight the importance of keeping enough cash in a RRIF to cover two or three years of mandatory withdrawals. Cash is trash these days from an interest-earning point of view, but it offers invaluable peace of mind when stocks plunge.

Now, what about people who took money out of their RRIFs in January and February, before the pandemic hit and the government dropped the minimum withdrawal amount? The word from the Canada Revenue Agency is that you can’t retroactively take advantage of the 25 per cent reduction in the minimum withdrawal.

“Individuals who withdrew more than the reduced 2020 minimum amount are not able to re-contribute the excess amount to their RRIFs,” a spokesman said by e-mail.