Access retirement savings during a pandemic

The global pandemic has led to unprecedented economic disruption, followed by unprecedented economic response measures by all levels of government in Canada. However, accessing retirement savings has seen little change. The federal government lowered the minimum Registered Retirement Income Fund (RRIF) payment by 25%. In Quebec, provincial Life Income Funds (LIFs) have seen an easing of requirements for the temporary income provision, expanding access to these accounts to Quebec residents who wouldn’t otherwise qualify. But what about accessing retirement savings beyond these measures, even from a Registered Retirement Savings Plan (RRSP)?

In an April 8, 2020 op-ed, the C.D. Howe Institute shared their RRSP withdrawal idea, which they coined the Financial Relief Plan (FRP). The framework for their idea is two existing programs that allow tax-free withdrawals and subsequent repayments over multi-year horizons — the Home Buyer’s Plan (HBP) and the Lifelong Learning Plan (LLP). Both allow withdrawals up to $35,000 and $20,000 total ($10,000 per calendar year), respectively. The HBP targets those individuals meeting the first-time home buyer definition or those buying a home for a related person with a disability. The LLP is intended to fund full-time training or education for an individual or their spouse. While eligible withdrawals under both programs are tax-free, they must be repaid starting in the year after the year of the withdrawal. For the HBP, repayments can happen over a maximum of 15 years, while the maximum repayment schedule for the LLP is 10 years. Amounts that aren’t repaid are taxable in the year they were due.

The C.D. Howe Institute outlined the framework for their idea, the FRP. Up to $20,000 could be withdrawn (tax-free) from an individual’s RRSP. This would be repaid over a 10-year period, identical to the LLP. All Canadians currently eligible for RRSPs, with adequate funds invested, would be able to participate. The only limitation is that the eligible withdrawal period would be restricted to six months.

This idea is intended to not only provide funds to households with immediate financial needs but also provide funds that could be immediately used to spur economic activity, such as a car purchase or home renovations. While this is purely conceptual, the Quebec government has implemented an easing of their temporary income withdrawal rules for Quebec LIFs to provide more Quebec residents access to some of their retirement savings.

Owners of a Quebec LIF may apply for temporary income if they meet certain conditions. The temporary income option allows withdrawals to exceed the usual maximum withdrawal from the LIF. If you have a Quebec LIF, you can determine your maximum temporary income amount by using Retraite Québec’s online calculator.

Under the normal temporary income rules, LIF owners:

• below age 54 can withdraw up to $23,480 annually (paid on a monthly basis) — 40% of maximum pensionable earnings (MPE) — by meeting the criteria of a very restrictive income test
• at least 54 years old but less than 65 years old can withdraw the sum of $23,480 per year — 40% of the MPE — without an income test
• 65 years of age and older — temporary income isn’t available

On April 16, 2020, Retraite Québec announced that for the 2020 calendar year only:

• for those under 54 years old, the income test is abolished and the payment will be made in one lump sum, not monthly
• temporary income will be available for LIF holders between 65 and 70

This is a welcome measure even though LIF holders who benefit will still have to pay the withholding tax at source and the final tax liability on the temporary income when they file their 2020 income tax return.

The Quebec government has provided Quebec LIF owners increased access to LIFs by easing the restrictions on eligibility for temporary income. Does this move suggest that the FRP proposed by the C.D. Howe Institute could work in reality? Let’s look at some possible pros and cons:

Pros

• Immediate access to retirement savings
  
• Spurs economic growth through increased household spending
• Reduces risk that individuals or households face extreme financial hardship, such as bankruptcy
• Provides a temporary supplement to household income that was reduced during the pandemic

Cons

• Temporary income withdrawals still considered taxable income for 2020
• FRP withdrawals only available for RRSPs (not locked-in accounts or RRIFs)
• Loss of future retirement income
• Loss of future economic activity associated with lower future retirement income

The effectiveness of the theoretical idea of the FRP or the actual easing of the temporary income option by the Quebec government could be a matter of perception. If there’s an immediate need caused by a loss of income or other financial hardship, liquidity now is necessary. Barring such necessity, the issue may rest with how you feel about the trade-off between today’s potential expenditure and tomorrow’s lost retirement income. Compelling reasons can be made on both sides of the debate and, with no clear winner, perhaps this is why we’ve yet to see a national initiative on this front.

These columns are current as of the time of writing, but are not updated for subsequent changes in legislation unless specifically noted.