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rrif gic calculation
March 23, 2019
8:54 am
Kidd
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maybe we could start a new tab dealing with financial calculations. i scoured the net yesterday, looking for a rrif gic calculation and then i just sat down and made my own. it's a very crude spreadsheet, there must be a better way to do this?

the values i used in the excel picture are for display purposes only. i highlighted the repeat calculation used throughout the sheet, showing how the amount of $2,000 a month is fixed $C$8, and how the interest rate is also fixed at 3% $C$9.

Loonie, i hope this picture is clear.

** I went for a walk last night and my kids asked me how long I'd be gone. I said, "The whole time."

rrif-gic-.jpg

March 23, 2019
4:20 pm
Loonie
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Thanks for considering my needs and abilities.

I can read the numbers OK, but I am baffled by them.

March 23, 2019
5:28 pm
Kidd
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After hearing Friday's inverted yield curve news, i decided to lock my rrif into a gic and the banks never show you their math. an asset being reduced while making interest is a tricky calculation.

The formula i used. (principal "A" - withdrawal amount) x interest rate % / 365 days x number of days in that month. Then to that you must add (principal "A" - withdrawal amount) this will give you principal "B" (which is the principal amount used in next month's calculation).

So the second month would be

(principal "B" - withdrawal amount) x interest rate % / 365 days x number of days in that month. Then to that you must add (principal "B" - withdrawal amount) this will give you principal "C" (which is the principal amount used in next month's calculation).

The only tweak i've made so far is. I caught that February 2020 has 29 days. I missed, 2020 has 366 days.

The question becomes... what if my end results differ from the banks?

March 23, 2019
6:17 pm
Norman1
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The calculations shown imply monthly compounding of interest. That may not be the case with an RRIF GIC.

I checked the terms and conditions of the RRIF's at Oaken and Hubert. Both mention annual compounding of interest and not monthly.

Annual compounding means that the monthly payments are 100% principal, except for the monthly payments on, or immediately after, the anniversary dates, when the interest is compounded.

March 23, 2019
6:44 pm
Kidd
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Yes, Norman you are correct. Reading the fine print, it states, interest is paid annually and compounded. It says nothing about... calculated monthly, on the minimum balance as i have spent my time figuring out.

If... my interest is only being calculated once a year either on December 31st, or on the anniversary date makes no sense. I was getting 2.5% calculated monthly on the minimum balance when it was just sitting in savings. A multiple year gic calculated once a year would need to pay 4 or 5 percent just to equal that same 2.5% in savings?

I will be calling them.

March 23, 2019
7:47 pm
Kidd
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Norman, i like you.

If a rrif gic's interest is calculated monthly and paid yearly. Will each month incur the full withdrawal amount with none of the hidden offset of the calculated interest? Wow, this is going to be difficult to explain.

A rrif in savings. Interest is paid monthly. So the interest paid offsets the withdrawal amount. Say, you pull $2,000 a month out of a rrif but you make $400 a month in rrif interest. Then the NET reduction to the rrif is $1,600.

With a rrif gic. If you pull that same $2,000 out each month and there is no offset. The interest calculation for the following month would be on (rrif amount - $2,000) not (rrif amount - $1,600) because the interest has not been realized.

March 23, 2019
8:34 pm
AltaRed
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Multi-year GICs are compounded annually IF a compound GIC. If a multi-year GIC is an Annual Pay, the interest is paid out annually and there is no compounding in subsequent years.

March 23, 2019
8:59 pm
Norman1
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Kidd said
Norman, i like you.

If a rrif gic's interest is calculated monthly and paid yearly. Will each month incur the full withdrawal amount with none of the hidden offset of the calculated interest? Wow, this is going to be difficult to explain.

With a rrif gic. If you pull that same $2,000 out each month and there is no offset. The interest calculation for the following month would be on (rrif amount - $2,000) not (rrif amount - $1,600) because the interest has not been realized.

That's correct.

The balance for next month's interest calculations will be reduced by the full $2,000 of the withdrawal. The accrued or still-unpaid interest is not part of that $2,000 withdrawal.

March 24, 2019
12:28 am
2of3aintbad
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In case the calculations are not yet clear, I'll throw in another perspective. The calculations have nothing to do with a RRIF. You started with a GIC that compounds annually at a fixed rate 3% for a fixed term (5 years?). Then you have added a fixed withdrawal amount $2000 at a certain frequency (monthly) with no penalty for the withdrawals.

That results in interest being calculated on the daily balance, but compounded annually (as opposed to compounded monthly in a typical savings account). In your spreadsheet, you need to include the day of the month in which your withdrawal is made. So you have working for you, earning 3%:
$200,000 on March 22
$198,000 after your first withdrawal
$196,000 after your second withdrawal
etc.
$176,000 after your 12th withdrawal
$176,000 plus interest after the compounding date March 22

The interest to be added on the compounding date will be different depending on the day of the month of the withdrawal, which does not need to be the 22nd or the last day of the month. The key is that the interest is calculated daily.

March 24, 2019
9:29 am
Norman1
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The amortization for daily interest accrual (based on daily closing balances), interest compounding annually, and the given month-end withdrawals would be something like this:

Date Withdrawal Interest Balance Days Interest
Accrued
Total
Accrued
22-Mar-2019 $0.00 $200,000.00 9 $147.945205 $147.945205
31-Mar-2019 $0.00 $200,000.00 30 $493.150685 $641.095890
30-Apr-2019 -$2,000.00 $198,000.00 31 $504.493151 $1,145.589041
31-May-2019 -$2,000.00 $196,000.00 30 $483.287671 $1,628.876712
30-Jun-2019 -$2,000.00 $194,000.00 31 $494.301370 $2,123.178082
31-Jul-2019 -$2,000.00 $192,000.00 31 $489.205479 $2,612.383561
31-Aug-2019 -$2,000.00 $190,000.00 30 $468.493151 $3,080.876712
30-Sep-2019 -$2,000.00 $188,000.00 31 $479.013699 $3,559.890411
31-Oct-2019 -$2,000.00 $186,000.00 30 $458.630137 $4,018.520548
30-Nov-2019 -$2,000.00 $184,000.00 31 $468.821918 $4,487.342466
31-Dec-2019 -$2,000.00 $182,000.00 31 $463.726027 $4,951.068493
31-Jan-2020 -$2,000.00 $180,000.00 29 $429.041096 $5,380.109589
29-Feb-2020 -$2,000.00 $178,000.00 22 $321.863014 $5,701.972603
22-Mar-2020 $0.00 $5,701.97 $183,701.97 9 $135.889128 $135.889128
31-Mar-2020 -$2,000.00 $181,701.97 30 $448.032255 $583.921383
30-Apr-2020 -$2,000.00 $179,701.97 31 $457.870773 $1,041.792156
31-May-2020 -$2,000.00 $177,701.97 30 $438.169241 $1,479.961397
30-Jun-2020 -$2,000.00 $175,701.97 31 $447.678992 $1,927.640389
31-Jul-2020 -$2,000.00 $173,701.97 31 $442.583102 $2,370.223491
31-Aug-2020 -$2,000.00 $171,701.97 30 $423.374721 $2,793.598212
30-Sep-2020 -$2,000.00 $169,701.97 31 $432.391321 $3,225.989533
31-Oct-2020 -$2,000.00 $167,701.97 30 $413.511707 $3,639.501240
30-Nov-2020 -$2,000.00 $165,701.97 31 $422.199540 $4,061.700780
31-Dec-2020 -$2,000.00 $163,701.97 31 $417.103650 $4,478.804430
31-Jan-2021 -$2,000.00 $161,701.97 28 $372.136041 $4,850.940471
28-Feb-2021 -$2,000.00 $159,701.97 22 $288.776165 $5,139.716636
22-Mar-2021 -$2,000.00 $5,139.72 $162,841.69
March 24, 2019
10:29 am
Kidd
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Norman, thank you very much.

This morning I sat down (with a better understanding) and I came up with numbers very similar to yours. My results are not the exact same but they were close. Thankfully, in a stationary or declining interest rate environment, I will be ahead (barely) at the end of the 2 year GIC term.

Thinking back, I had a 1 year gic rrif before and at that time, I posted here on this forum about how confused I was on the withdrawals and how interest was paid.

https://www.highinterestsavings.ca/forum/rrsps-and-rrifs/converting-rsps-to-rifs/

Thanks again.

** If quitters never win, and winners never quit, what fool came up with, "Quit while you're ahead?"

March 25, 2019
9:10 pm
Norman1
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Kidd said

Norman, thank you very much.

This morning I sat down (with a better understanding) and I came up with numbers very similar to yours. My results are not the exact same but they were close. Thankfully, in a stationary or declining interest rate environment, I will be ahead (barely) at the end of the 2 year GIC term.

You're welcome!

Make sure to round the March 22, 2020 interest payment. A common mistake is to forget to round the accrued interest to the nearest cent when it is paid or compounded. That extra 0.2603¢ in the account balance will cause the subsequent accrued interest calculations to be off by a bit.

June 29, 2024
3:56 pm
julio
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Someone might know, and thank you for the answer, if RRIF GIC value on Dec31 for compulsory withdrawal the following year, e.g. November, includes accrued interest by said Dec31?
Example: On July01 value is $100K, sitting in a 5Y 5% GIC with yearly payouts. On the first encountered Dec31, is the value still $100K or 102,5K?

June 29, 2024
11:19 pm
Norman1
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The fair market value (FMV) of the RRIF would include accrued interest to December 31. But, the FMV of the GIC, less the accrued interest, may not still be $100,000 on December 31.

CRA's position was expressed in an October 18, 2001 Technical Interpretation 2001-0083777 (Calculation of RRIF fair market value):

The term "fair market value", as it applies here, is not defined in the [Income Tax] Act and, therefore, takes on its ordinary meaning in its application under the Act. Black's Law Dictionary (6th edition) defines fair market value as "the amount at which property would exchange hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts".

It should be noted that the fair market value of an interest bearing product at a given point in time will not necessarily correspond to the cost value of the product, adjusted for any interest accrued to the date of determination. The fair market value will be a question of fact that is dependent upon various market factors and expectations.

It is the responsibility of the trustee of a RRIF to file the appropriate information returns for the trust and to report, as required, the fair market value of the property held in the trust. Where necessary, it may be appropriate for the trustee to use expert valuators to determine the necessary information. However, this is not specifically required under the Act.

June 30, 2024
6:05 am
Bill
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My registered plans monthly statements from RBC Direct Investing, for example, show a market value for any GICs which is essentially the principal plus accrued interest to statement date.

Pretty sure brokers use that for Dec 31 FMV of RRIF, pretty sure CRA accepts that value.

June 30, 2024
6:54 am
AltaRed
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Norman1 said
The fair market value (FMV) of the RRIF would include accrued interest to December 31. But, the FMV of the GIC, less the accrued interest, may not still be $100,000 on December 31.

  

In the case of GICs where there is not a viable secondary market, I would suspect the deemed FMV would be face value plus accrued interest. I confess to not paying attention to this level of detail albeit GICs have not been a significant part of my RRIF in any event.

June 30, 2024
8:13 am
julio
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Thank you Norman1, Bill, and AltaRed. Thus, for me, I'll put an equal sign between (FMV) and (GIC principal + accrued interest) and use it to estimate the FMV of the RRIF for Dec31. Thank you again.

June 30, 2024
8:22 am
AltaRed
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AFAIK, every FI does (or should) calculate and tell you the amount of minimum annual withdrawal within a week or so of January 1st every year....for that year so that every RRIF holder knows their minimum withdrawal obligation for that year.

June 30, 2024
8:34 am
Case1030
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On *my* TDDI Dec 31 statement, there is accrued interest included in the "Market Value" for the medium and long term GICs (2-5 years). The short term GIC (8 months into a 1 year term), and the monthly paid GIC, are just shown at book cost value.

The value shown when I log in, just shows the current value at book cost on *all* the GICs. I never noticed this before. Go figure. sf-cool

June 30, 2024
9:11 am
AltaRed
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Spouse's RBC DI account shows accrued value of 1-5 year GICs on monthly statements, whether annual pay or compound annual, but does not show accrued value of 1 year GICs online (only principal face value).

For the purpose of Portfolio Value on Dec 31st, the December statement should thus reflect accrued values for year end FMV.

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