This article was reviewed by Jay Brecknell, CFP®.
At Cedar Rock, we often say the one thing you can expect in life is change. Retirement is one of life’s biggest changes, not just to your daily rhythms and lifestyle, but to how you think about finances. Instead of earning a regular paycheque, your income will come from multiple sources, such as government benefits, your work pension plan, and registered and non-registered retirement savings plans. Additionally, the goal is no longer solely to grow your investments; it’s to make them last and withdraw as tax-efficiently as possible.
A thoughtful retirement withdrawal strategy can help you coordinate these sources, manage your taxable income, and make your retirement savings work harder for you over the years ahead.
How does your income impact your retirement withdrawal strategy?
To create a tax-efficient retirement withdrawal strategy, it’s important to first understand where all of your income will come from. In retirement, your income is less straightforward than during your years of employment. Now, your income will come from multiple sources, including but not limited to:
- Pension Plans
- RRSP or other registered retirement savings account
- CPP and OAS
Each of these retirement income sources affects each other and impacts your overall tax bracket. Ultimately, the goal is to minimize the amount of taxes you pay, while maximizing your income so you can enjoy the retirement lifestyle you worked so hard for. For instance, if you are in the 20% tax bracket and need an additional $10,000 for a home renovation, you need to know if withdrawing that money from say, your RRSP would bump you into the next tax bracket (and therefore withdrawing from your TFSA would be more prudent).
What should you consider when deciding on a retirement funds withdrawal strategy?
Your retirement dreams are personal, and the strategy that will best achieve them is going to be personal too. Many factors go into creating a tax-efficient retirement plan, including your anticipated income and your outgoing expenses, such as:
- Charitable giving plans
- Anticipated and ongoing health expenses
- Home expenses – especially any anticipated large expenses for renovations or home improvements
These considerations are not only important when initially creating your retirement fund withdrawal strategy, but it is also important to revisit your plan every year and make any necessary changes. Retirement planning is never a set-it-and-forget-it thing.
What is the best strategy to withdraw your retirement savings?
There is no blanket approach to retirement strategy, and at Cedar Rock Financial, it is something we review with clients annually to ensure ongoing alignment with your lifestyle, needs, and priorities. However, there are common approaches you can use as a starting point when considering your own approach.
- A common approach is to withdraw from non-registered (taxable) accounts first, then from registered (tax-deferred) accounts such as an RRSP or RRIF. This allows your registered accounts to continue growing, maximizing compound growth. One thing to consider regarding RRSP withdrawals is to draw down this account before you are forced to convert it to an RRIF, which then has a minimum withdrawal amount (based on your age) and could bump you into another tax bracket. For some, it may be better to evenly withdraw from all accounts, as it may decrease the lifetime amount of taxes paid.
- Oftentimes, delaying your CPP and OAS benefits until age 70 can help you avoid the OAS clawback (which happens when your income exceeds a certain threshold) and increase your payments. That said, when you should take your CPP and OAS will be specific to each individual, and there are many considerations that go into it. What’s important to remember for tax-efficient retirement planning is that once you begin receiving your government benefits, you will have minimal control over how much you receive, and therefore, it is difficult to optimize these payments for tax efficiency. Manipulating the other income sources is a better strategy.
- Because withdrawing from your TFSA doesn’t typically affect your government benefits or taxable income, many will opt to let the funds in this account continue to grow. The TFSA is also one of the best ways to pass on an inheritance to the next generation, so at Cedar Rock Financial, we typically recommend withdrawing from the fund only when additional income is needed.
- For couples, income splitting can be a useful strategy to maximize tax efficiency. With this tactic, up to 50% of the higher-earning spouse’s income can be put towards the lower-earning spouse’s tax return, thus reducing the household amount of taxes paid.
As you can see, having a personalized strategy is very important. What works for one person may not work for you, as your needs, lifestyle preferences, health situation, investment portfolio, pension status, and so many other factors will create important differences that will influence your optimal strategy.
What is the ultimate retirement income goal?
There is no one-size-fits-all approach to withdrawing your retirement savings. The right strategy needs to account for your income sources, tax bracket, lifestyle goals, investment portfolio, and health requirements, among other things. And this strategy will need to evolve alongside you and life’s changes.
By reviewing your withdrawal strategy regularly and making thoughtful decisions about when and where to draw your income, you can reduce unnecessary taxes while creating a sustainable income stream for the retirement you envision. After years of building your wealth, the ultimate goal for your retirement income is to ensure your money lasts as long as you need and provides the lifestyle you worked so hard to enjoy.
Frequently Asked Questions
1. What factors should I consider when creating a tax-efficient withdrawal strategy for retirement?
Your retirement dreams are personal, so your withdrawal strategy should be too. Beyond your anticipated income, you’ll want to factor in expenses like charitable giving plans, anticipated and ongoing health costs, and home expenses — particularly large ones like renovations. It’s also important to revisit your plan every year, since retirement planning isn’t a set-it-and-forget-it exercise.
2. Once retired, should I withdraw from my registered and non-registered savings accounts in a particular order?
A common approach is to draw from non-registered (taxable) accounts first, then move to registered accounts like an RRSP or RRIF, allowing those funds more time to grow through compounding. It’s also worth drawing down your RRSP before you’re required to convert it to a RRIF, since RRIF minimum withdrawals could push you into a higher tax bracket. That said, some individuals may benefit more from withdrawing evenly across all accounts, as this can reduce the total taxes paid over a lifetime — there’s no single approach that works for everyone.
3. When should I start taking CPP and OAS?
Delaying CPP and OAS until age 70 can help you avoid the OAS clawback and increase your monthly payments. However, the right timing depends on your individual circumstances. Keep in mind that once you begin receiving government benefits, you have minimal control over the amount, so it’s generally more effective to focus your tax-efficiency efforts on the income sources you can actively manage. We recommend checking out this article we wrote on the topics, or booking an appointment to discuss with a financial advisor.
4. What role does my TFSA play in a tax-efficient retirement withdrawal strategy?
Because withdrawals from a TFSA generally don’t affect your taxable income or government benefits, many people choose to let this account continue growing and draw from it primarily when extra income is needed. This flexibility can make your TFSA a valuable tool for managing your tax picture in retirement.