New longevity-planning tool allows deferral of taxable withdrawals, but there are limits
Given longer-than-ever life expectancies, Canadians face a greater-than-ever risk of outliving their retirement savings. This is compounded by the fact that, in the case of RRIFs, they’re required to withdraw a minimum amount of taxable income starting on the year they turn 71.
A new type of annuity can offset that risk – but there are limitations that retirees must keep in mind.
As noted by Lydia Roseman and Michelle Fong of McLennan Ross LLP, the advanced life deferred annuity (ALDA) allows individuals who do not need to draw down their registered funds at age 71 to continue holding some of their funds tax-free until they’re 85 years old.
“The ALDA is also a great tool for longevity planning,” Roseman and Fong wrote in a blog post. “By purchasing an ALDA, you ensure that there are funds available to support you in your (much) later years.”
As drafted, the legislation implementing the ALDA indicates that it came into effect on January 1, 2020, though it has yet to be enacted. Under the legislation, an ALDA can be purchased under several types of plans, including an RRSP, a RRIF, and a deferred profit sharing plan, among others. It’s also regarded as a “qualified investment” for a trust governed by an RRSP or RRIF.
“There are, however, a couple limits on the amount of an ALDA that an individual can purchase,” Roseman and Fong said. Specifically, ALDA purchases are subject to a $150,000 lifetime limit (indexed to inflation) and a lifetime limit of 25% of any particular qualifying plan.
Because the limits are applied at the time of purchase, any subsequent devaluation of assets held in a plan and corresponding decrease in the lifetime ALDA limit will not result in a surrender of the excess amount. From a planning standpoint, that means the most ideal time to purchase an ALDA is when the value of assets in a qualifying plan is at its peak, thus ensuring maximum contribution to the ALDA and, therefore, maximum tax deferral.
“The value of the ALDA will be excluded in calculating the minimum amount that must be withdrawn in a year from a RRIF, PRPP or defined contribution RPP,” the two authors noted.
ALDA purchasers stand to enjoy two benefits from a tax perspective. They may defer taxes of up to 25% or $150,000 of the funds they hold in a registered plan until they are 85. Excluding the value of the ALDA from their RRIF, PRPP, or defined contribution RPP minimum calculation also means lower regular payments out of the funds/plans, which would spell even more tax savings between the ages of 71 and 85.
Those considering ALDAs must be wary of the risks of excess purchases; individuals who go beyond their limit will face a tax of 1% per month on the excess amount. However, if they can establish that the overcontribution was a reasonable error and the excess amount is repaid to the registered fund it was taken from by the end of the following year, all or part of the penalty may be waived.
“A non-compliant ALDA contract will be considered a non-qualifying annuity purchase or a non-qualified investment for tax purposes,” Roseman and Fong added. “This may mean an immediate tax liability.”
