UNPRECEDENTED TIMES CALL FOR UNPRECEDENTED MEASURES

Understanding COVID-19 Retirement Relief Measures on both sides of the border

The COVID-19 pandemic affected individuals worldwide and governments responded with drastic financial relief measures for 2020. Both the Canadian and U.S. governments responded by providing a number of tax relief provisions. This edition of WWB highlights the relief measures that were available in 2020 for retirement plans and the impact for our cross-border clients.

WHAT WERE THE CANADIAN RETIREMENT RELIEF MEASURES?

Registered Retirement Income Fund (RRIF) owners are required to withdraw a minimum amount each year, starting the year after the RRIF is established. The usual minimum withdrawal amount is based on the client’s age and the market value of the RRIF at the start of the year. As part of Canada’s COVID-19 Economic Response Plan, the amount of the required minimum withdrawal was reduced by 25% for 2020. The lowered minimum also applied to Life Income Funds (LIFs) and other locked-in RRIFs. Unfortunately, RRIF holders who had already withdrawn more than the reduced minimum amount were not permitted to recontribute the excess back into their RRIFs. In Canada, there were no special retirement plan withdrawal provisions for those who had been directly affected by COVID-19.

WHAT WERE THE U.S. RETIREMENT RELIEF MEASURES?

Similarly, in the U.S., holders of Individual Retirement Accounts (IRAs) and 401(k)s are required to withdraw a minimum amount each year based on the age the client will turn in the current year and the market value of the retirement account at December 31st of the previous year. The Coronavirus Aid, Relief and Economic Stimulus (CARES) Act eliminated required minimum distributions for holders of individual retirement accounts (IRAs) and 401(k)s for 2020. Retirement account owners who had already taken distributions had until August 31, 2020 to recontribute funds back into their retirement account.

The U.S. CARES Act also allowed retirement account holders of any age to take ‘Coronavirus-Related Distributions’. Eligible individuals were permitted to withdraw up to $100,000 in 2020 from their retirement plan and have it characterized as a Coronavirus-Related Distribution. Eligible individuals were specified as those who were diagnosed with COVID-19, those whose spouses or dependents were diagnosed, or those who experienced financial hardship from the pandemic. The penalty that would have applied on the withdrawal was waived for these distributions. The Coronavirus-Related Distribution was added to taxable income on a prorated basis over three years so that the income tax owing on the withdrawal was spread out. As well, if the withdrawn amount was recontributed back into the retirement plan within three years, the tax liability that arose from the original withdrawal was refundable by amending prior year tax returns.

WHAT IS THE IMPACT FOR OUR CROSS-BORDER CLIENTS?

Canadian and U.S. government relief measures allow retirees in both countries to keep more money in their retirement plans in 2020. This reduction of minimum withdrawals was a significant benefit for retirement investments where the value was reduced from the market correction in 2020. This is because the minimum amounts for 2020 were calculated based on a potentially higher market value (January 1, 2020 for Canadian retirement accounts and December 31, 2019 for U.S. retirement accounts). Reducing the required withdrawal in Canada and eliminating the required withdrawal in the U.S. allowed retirement investments to recover as the market rebounded. Slowing down the forced depletion of a retirement plan is financially beneficial for those who have other sources of income and don’t need the required withdrawal amount for cash flow purposes. The income distribution for the 2020 tax year was deferred and the investments benefited from an additional year of tax deferred growth.

For our American clients who were impacted by Covid-19, the relief provisions in the CARES Act provided the flexibility to take withdrawals in 2020. The provision was only to be used as a last resort for emergency funds as it is generally preferable to draw on a line of credit or use other available funds before drawing on retirement funds. This is because the tax-deferred growth is lost on withdrawn retirement funds. As always, we recommend clients speak with us about their individual situation, as these government measures are fluid and subject to change.