Retirement withdrawal
There’s a lot of attention given to saving for retirement, including automatic Registered Retirement Savings Plan (RRSP) contributions, the annual TFSA top-up and the slow but steady growth of a workplace pension. But things get trickier as soon as the paycheques stop.
A recent report from Wealth Professional Canada (1) backs this up, noting that most Canadians know how to save, but few have a concrete plan for drawing down their savings in retirement.
Two retirees with identical balances can end up with very different outcomes depending on which account they access first, when they start taking Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, and how withdrawals impact their tax situation.
Don’t Miss Why does the order of withdrawals matter so much?
Not all retirement accounts are taxed the same way, and that single fact reshapes the math.
For example, money you withdraw from an RRSP or, after age 71, from a Registered Retirement Income Fund (RRIF), is fully taxable in the year it is withdrawn, according to the Canada Revenue Agency (CRA). On the other hand, TFSA withdrawals are not taxed and do not count as income.
Non-registered accounts fall somewhere in between. Income is taxed, but often at better rates for dividends and capital gains.
The order in which you draw from your pool of funds can affect your tax bill and government benefit amounts. While everyone’s situation is unique, pulling heavily from an RRSP early can push you into a higher bracket and trigger an OAS clawback. But if you only take from your TFSA and leave RRSP balances to grow, it can create a larger forced-withdrawal problem later, when RRIF minimums kick in.
To get started, open a no-fee RRSP high-interest savings account. For instance, EQ Bank offers registered accounts with no-fees and high interest rate earnings. For a limited time, get up to $200 cash when you add new deposits to your EQ Bank RRSP account.
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When should Canadians start CPP and OAS?
Canadians can start collecting CPP (2) as early as age 60 or as late as 70, while many decide to take it as soon as it’s available (3). But starting at 60 reduces your benefit by 0.6% per month before 65, for a 36% payment reduction. By delaying beyond 65, you increase your benefit by 0.7% per month, or 42% more if you wait until 70.
OAS works on a smaller scale (4): it can be deferred from 65 to 70 for a 0.6% monthly increase, capped at 36% more at age 70.
If you’re in good health with savings to bridge the gap, delaying these benefits acts like inflation-indexed longevity insurance. For others, particularly those facing health concerns or limited savings, taking benefits earlier may make more sense.
Read more: 3 essential money moves to make once you’ve saved $50,000
What does the RRIF rule actually force you to do?
You can’t leave your RRSP untouched forever. By the end of the year in which you turn 71 (5), you must convert it to a RRIF, use it to buy an annuity, or cash it out (rarely a good idea given the tax hit).
If you convert to an RRIF, you must withdraw a minimum percentage (6) each year (it’s 5.28% at age 71, and increases from there). Those minimums are considered taxable income, whether you need the money or not.
The idea here is that if you delay making any RRSP withdrawals until you are forced to start at 71, you could be facing large mandatory withdrawals exactly when your CPP and OAS are flowing in. The combination can push you into a higher bracket and even into OAS-clawback territory (7).
What should your retirement withdrawal plan actually include?
The Financial Consumer Agency of Canada (FCAC) emphasizes the importance of creating a retirement income plan (8) that aligns your spending needs with your various income sources, such as CPP, OAS, workplace pensions and personal savings (RRSP/RRIF, TFSA, non-registered accounts).
A useful plan should answer five questions:
How much annual income will you need in early retirement, and how might that change later?
Which accounts will you draw down first, and why?
When will you start collecting CPP and OAS?
If applicable, how will you coordinate withdrawals with your spouse to keep both of you in lower tax brackets?
What is the contingency if markets fall or one spouse dies earlier than expected?
Sometimes, drawing modest RRSP amounts before you begin taking CPP and OAS can flatten your lifetime tax. For Canadians with significant TFSA balances, this account often works best as a flexible reserve. And for retirees with a defined-benefit pension, guaranteed income provides a higher floor. Before you make any final decisions, make sure you consult an accountant or other qualified tax professional.
What to do now
Your retirement income plan doesn’t need to be complicated, but you still need one before you retire. Start by estimating your retirement spending in today’s dollars and compare it with your expected CPP, OAS and pension income. This will illustrate how much of your lifestyle will need to be funded from your personal savings.
From there, you can:
Map your expected annual spending against your guaranteed income sources
Decide the order in which you’ll draw from your RRSP/RRIF, TFSA and non-registered accounts, and document that plan
Determine when you’ll start CPP (age 60 to 70) and OAS (age 65 to 70), recognizing that delaying increases the monthly benefit
Coordinate withdrawals with your spouse to help keep both of you in lower tax brackets
Review your plan annually, particularly in the years leading up to the RRSP-to-RRIF conversion at age 71
Speak with a fee-only planner or CPA if you have a workplace pension or a more complex tax situation
The FCAC’s retirement-income tools (9) and the CRA’s RRIF withdrawal tables (10) are good places to start, and a professional can help model tax outcomes that are difficult to estimate with basic calculators. Remember, saving builds your retirement nest egg, but a smart withdrawal strategy will turn it into a sustainable retirement income stream.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.
Wealth Professional Canada (1); Government of Canada (2), (4), (5), (7), (8), (9), (10); Benefits and Pensions Monitor (3); UBC Pensions (6)
This article originally appeared on Money.ca under the title: Most Canadians save for retirement, but skip the withdrawal plan that makes the money last
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.