How and when to withdraw from RRSP and TFSA
What a journey it’s been, but it’s soon time to figure out how and when to withdraw from the RRSP and TFSA.
Read on!
The Journey:
I’ve been writing about personal finance and investing for almost 15 years now – chronicling my path to semi-retirement and financial independence. But the time has come to consider how and when to withdraw from my RRSP and TFSA.
Should RRSP assets be withdrawn first?
Should I withdraw from my TFSA to live-off tax-free dividends and distributions to some degree?
When should I consider withdrawing from other accounts?
Read on for my thoughts, the tax implications and more, including what might apply to your portfolio.
Source: Behavior Gap
How and when to withdraw from RRSP and TFSA
In profiling my financial independence journey, most of my content has been about asset accumulation. The goal? To build an ever growing income stream for semi-retirement.
Why my goal to live off dividends remains alive and well.
This is how I built my Canadian dividend portfolio – and how you can too!
However, the time has come to consider, I mean strongly consider, how I’m going to enjoy the fruits of my labour so to speak. 🙂
In some recent posts, I’ve started to discuss the emotional readiness needed for semi-retirement. I wrote about moving well into my anticipation-phase now, pondering what the next phase of my life might mean.
Am I an entrepreneur? A consultant? A cyclist? A golfer? A traveller? A craft beer enthusiast? A volunteer?
All the above and more maybe!
How I got this far
When it comes time to withdraw from my/our portfolio, I am keeping two key things in mind:
- How best to meet my income needs.
- How best to withdraw from my portfolio with tax efficiency in mind.
Unlike other retirees, there is no desire for us to leave anything substantial for the estate. Sorry family!
To fulfill #1 and #2 above, we have the following assets to consider in no particular order of portfolio value:
- x1 – my defined benefit pension plan from work (about 21 years in at the time of this post).
- x1 – my wife’s defined contribution pension plan from work (also about 20 years contributed).
- x1 – my Locked-In Retirement Account (LIRA).
- x2 – RRSPs.
- x2 – TFSAs.
- x1 – taxable account.
- x1 – corporation; soon to be corporate investment account.
______________
9 accounts.
Figuring out the most efficient withdrawal strategy amongst these 9 accounts depends on many factors and I believe it requires some decent financial planning software to get the best answer. There are however some great, free retirement calculators to consider here.
Here are some considerations and key options I’ve been thinking about when it comes to my drawdown order.
1. My defined benefit pension
My wife and I are both very fortunate to have some workplace pensions to draw from in our future. My pension is a defined benefit (DB) pension plan. That means my future benefits (income) is defined.
That said, I might commute my pension. In fact, I might be forced to.
Should you take the commuted value of your pension?
I’ve been contributing to this plan with the following formula:
1.6% x your Best Average Earnings x years of pensionable service.
Here are my pension terms, word-for-word:
So, while my DB pension benefit can be received as early as age 55, there will be reductions. At 55, the pension income is reduced by 0.4% per month prior to age 60. It is reduced stil by 0.3% per month between ages 60-65. I wish to avoid any early withdrawal penalties.
My best guess is the pension value might be worth closer to $30,000 per year when I retire. The pension is also indexed to 75% of CPI when less than 2%, indexed to a maximum of 5.5% of CPI should I retire at age 55. There is a 66.6% survivor benefit to consider as well.
2. My wife’s defined contribution pension
My wife has a defined contribution pension plan. That means her contributions are defined but her income benefits in retirement are not. We have her portfolio invested in as many indexed funds as possible – which have served her well. Her portfolio returns since inception (about 20 years) are north of 7%, which includes a 30% fixed income component. Her 10-year returns are 10.4%.
We’re optimistic her DC pension could be worth a few hundred thousand at the time of semi-retirement. That money would be moved from the employer pension to a LIRA, then to a LIF at age 55 to open the income taps.
What is a LIRA and how should you invest in it?
If we decide to semi-retire from the workforce in the coming years (that’s the plan) we’ll need money to close the income gap between leaving full-time work and when these pensions kick in.
3. My LIRA
With a few exceptions, you can’t withdraw money from your Locked-In Retirement Account (LIRA) before you retire. It’s not really possible to add more to this account either.
LIRAs are actually hard to come by. You can’t get a LIRA unless one of the following occurs:
- You have a workplace pension plan and you move jobs (voluntarily or involuntarily), your pension money from your former employer’s pension plan goes into a LIRA. If you have a LIRA it’s because you were part of a pension plan with a previous employer, OR
- You receive money from your former spouse’s employer pension plan, during the division of assets when you divorce, for example.
Is a LIRA different than an RRSP?
Yes but also no.
The “yes” side of this equation is that the RRSP is a tax-deferred savings plan designed to help Canadians save for retirement. As you know, contributions to an RRSP are voluntary; there are maximum RRSP contribution limits and while there is no tax on the growth of the investments inside the RRSP, tax is however paid when money is withdrawn from the RRSP or its future-state successor, the RRIF.
A LIRA is similar in that it allows you to transfer the funds accumulated in a former employer’s pension plan to an individual, tax-sheltered plan. The challenge with the LIRA is you can’t really make contributions to this account or withdraw money from it before retirement*
*There are however some cases instances/cases that can apply to financial hardship.
With my LIRA, I cannot make withdrawals and there are no big lump sum withdrawals from LIRAs like you can do with an RRSP. If you want money from a LIRA, generally speaking, you must move the money into a Life Income Fund (LIF) or Life Annuity. As long as assets stay within the LIRA or LIF there is no taxation. Tax is however payable on the withdrawals or income generated – that means the LIRA to a LIF and RRSP to a RRIF are very similar.
At age 55, my plan is to “unlock” LIRA assets as much as I can, and move unlocked assets to my RRSP and then start the LIF to slowly draw down the remaining LIF assets over time. That income stream will be quite small however given my LIRA is under 6-figures.
4. Our Registered Retirement Savings Plans (RRSPs)
You are also likely aware that the RRSP and TFSA are essentially mirror-images:
|
RRSP |
TFSA |
| A tax-deferral plan. | A tax-free plan. |
| Contributions can be made with “before-tax” dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution. | Contributions are made with “after-tax” dollars.
|
| Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate. | Contributions are not tax deductible; there is no refund to be had. |
| If you don’t contribute your maximum allowable amount in any given year you can carry forward contribution room, up to your limit. | |
| If you make a withdrawal, contribution room is lost. | If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year. |
| Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal. They are treated as income and taxed at your current tax rate. | Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal. |
| Since withdrawals are treated as income, withdrawals could reduce retirement government benefits. | Withdrawals are not considered taxable income. So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals. |
| You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year. | You can contribute to a TFSA after age of 71. |
| The Summary: part of your RRSP is borrowed money. | The Summary: all of your TFSA is your money. |
Based on my personal investment plan, while I always feel the TFSA ultimately trumps the RRSP as a contribution retirement vehicle I will continue to contribute to both.
Over the last few years, I’ve become more savvy with retirement drawdown options.
Should I withdraw my/our RRSP assets first?
Should I withdraw from my/our TFSA to live-off tax-free dividends and distributions to some degree?
Based on my work with various clients and revisiting my own drawdown needs (for income and to minimize taxation), I believe I will leverage the following retirement draw down order:
“NRT“: that stands for Non-registered (N), RRSPs (R), TFSAs (T).
This means I will slowly drawdown my non-registered account, living off dividends and distributions along the way, and slowly exhausting RRSP assets before I have to turn the RRSP to a RRIF in the year I turn age 71.
This means in our 50s and 60s, we’re going to do something unconventional – we’ll start withdrawing assets from our RRSPs. This will help smooth out taxes given other assets we hold. In doing so, we will slowly reduce the tax liability that is our RRSP/RRIF assets. Here is an example:
Source/Reference: Taxtips.ca
You can leverage this calcular and more, free, from my Helpful Sites page.
I/we will withdraw from our RRSPs likely once per year, at the start of the calendar year, by selling assets and/or through a combination of stopping our dividend reinvestment plans. Money not needed for living expenses will be moved into our TFSAs.
Our plan is to exhaust all RRSP/RRIF asests by age 80 if not sooner.
So, to summarize:
- I will make slow RRSP withdrawals in my 50s and early 60s.
- I will consider turning any residual RRSP assets into a RRIF at age 65 for pension income splitting.
For taxpayers 65 years and older, the pension income tax credit includes:
- Foreign pensions
- A Registered Retirement Income Fund (RRIF).
- Annuity payments from a Registered Retirement Savings Plan (RRSP) or a Deferred Profit Sharing Plan (DPSP)
We will likely exhaust all RRSP/RRIF assets by our early 70s. This is how you can withdraw from your RRSP effectively.
Other things to keep in mind, for me too!
RRSP withholding tax is charged when you withdraw funds from your RRSP before retirement.
That withholding tax rate depends on how much you withdraw and where you reside. If you are a resident of Canada, the withholding rates are as follows (as of publication):
- 10% (5% in Quebec) on amounts up to $5,000
- 20% (10% in Quebec) on amounts over $5,000 up to including $15,000
- 30% (15% in Quebec) on amounts over $15,000
(Residents of Québec also pay a provincial sales tax of 15% in addition to the federal withholding tax. If you are a non-resident of Canada, you will pay a 25% withholding tax rate, regardless of the size of the withdrawal.)
This is not the only way I/you will be taxed.
The amount withdrawn will count as income, so you’ll have to declare it come tax time as income. If the withdrawal ends up putting you in a higher tax bracket, you’ll have to pay more income tax, since the withdrawal tax likely won’t cover the full amount of income tax you’ll owe.
Keep this in mind for any early RRSP withdrawals: withdrawing RRSP assets prematurely has tax consequences.
When you withdraw from your RRSP, your financial institution will provide a T4RSP showing the amount you withdrew, and how much tax was withheld. You must declare this amount on your T1 General Income Tax Return in the calendar year you withdrew it. You can find the income tax rates for the current year on the Canada Revenue Agency (CRA) website.
5. Our Tax Free Savings Accounts (TFSAs)
Love the account, hate the name! 🙂
The Tax-Free Savings Account (TFSA) is far more than a savings account, and unfortunately, many Canadians still cannot get over this fact. Check out these facts according to a recent BMO study:
- Although 73 percent of Canadians consider themselves knowledgeable about TFSAs, only half (49 percent) of Canadians are aware that a TFSA account can hold both cash and at least one of the other investments.
- Canadians primarily use their TFSA accounts for various financial goals, yet just 44 percent are using a TFSA for retirement savings.
While the TFSA can absolutely be used for short-term savings, earning tax-free interest while you’re at it, I’ve been using my TFSA since Day 1 for investing.
As we live off dividends from our non-registered account while slowly drawing down our RRSP/RRIF assets, I suspect we’ll avoid tapping our TFSAs until our elderly years. In fact:
We don’t intend to touch our TFSA assets in any early retirement years at all…
Instead, this will allow both TFSAs to compound over time. In our 70s, with RRSP/RRIF assets largely gone, our plan will be to live off tax-free income from our TFSAs and government benefits (CPP and OAS).
I’ve anticipated our TFSAs are likely going to be worth hundreds of thousands of dollars in the coming decades, which should be more than enough to fund senior care. For estate planning, I’ve always encouraged my readers to read the “fine print” when it comes to naming beneficiaries for your RRSPs, RRIFs, TFSAs and other key accounts.
Check out that very important post here – beneficiaries to consider for TFSAs, RRSPs/RRIFs and more.
Given TFSA assets can be passed along tax-free, this has always been my preference to make the TFSA one of the accounts to consider keeping “until the end”. Just make sure you read that link above and consider naming a TFSA successor holder.
I believe this is how and when you can withdraw from your TFSA effectively too!
6. Taxable investing
Passionate readers of this site will already know that I prefer keeping and growing any money tax-free (TFSA) and tax-deferred (RRSP) is always a great move before taxable investing.
With our TFSAs thankfully out of contribution room, after our RRSPs are ideally maxed out every year we also invest inside our taxable account.
As any savings for investing purposes permit, we will continue to invest inside our taxable account every year where possible.
7. Corporate account
I’m still quite new to managing my corporation but so far, it’s been helpful to avoid any taxation at my personal rate.
If you would like to know more about incorporation details, including how you might eventually pay yourself a salary or a dividend, check out these comprehensive posts below:
How to invest inside a corporation.
Should you take a salary or pay yourself a dividend from your corporation?
Regarding income from this corporation, I’m still undecided how I will manage that. I will let you know of course when I do!
What about government benefits???
Given our Canada Pension Plan (CPP) and Old Age Security (OAS) income benefits are secure, I tend to treat these government beneifts as “big bonds”. Even better, they are inflation-protected big bonds! So, I invest 100% equities for now.
Back to the premise of this post, here are some of my general rules of thumb when it comes to how and when to withdraw from the RRSP and the TFSA:
1. Withdrawing from your RRSP (early) can make great sense before other accounts. As outlined above, even though you do not need to collapse your RRSP until December 31 in the year you turn age 71 (i.e., you are forced to convert it to a RRIF, annuity, etc.), I believe drawing down the RRSP assets early has huge merit. For one, any large RRSP/RRIF balance is an estate liability. Two, if you draw down the RRSP/RRIF before the TFSA or other accounts, you can potentially live on RRSP/RRIF withdrawals before CPP or OAS kick-in. Three, if you did that, you have a considerable advantage to delaying CPP or OAS or both benefits until age 70 offerring the following:
- CPP offers a 42% income boost if you defer CPP benefits from age 65 to 70.
- OAS offers a 36% income boost if you defer OAS benefits from age 65 to 70.
2. RRIF income can be used for income splitting as much as possible. If you have a spouse, you probably already know the goal is to keep any personal income as equal as possible, but higher collectively, to maximize income and minimize taxes.
If you are age 65 and older, RRIF withdrawals are eligible for income splitting with a spouse for tax purposes, and to be eligible for the $2,000 pension tax credit per person.
3. Keep TFSA assets compounding away as long as possible = tax-free income is a wonder of our modern financial world! Keeping tax-free accounts intact does not impact any OAS recovery tax threshold.
The dreaded “OAS clawback” will see OAS income benefits reduced by 15% for every dollar above this threshold until it’s eliminated. So, if you want to keep your retirement income under this threshold AND maximize government benefits, a combination of deferring OAS and keeping your TFSA “until the end” is tax-savvy.
You can check out the various tax brackets in play related to OAS and other tax consequences here.
Needless to say, having any tax-efficient family income approaching $80k per person to avoid any OAS clawback would be phenomenal in retirement….
4. Spend dividends from non-registered accounts and any corporate portfolio before TFSAs. In my case, I hope to spend some tax-efficient Canadian dividends in semi-retirement, before touching my TFSAs. It is my hope I will also wind down any corporate account before I take OAS, likely by age 65 but that could be age 70. Otherwise, the sum of taxable dividends, corporate portfolio withdrawals amongst other income sources could trigger that OAS clawback I mentioned above.
How and when to withdraw from RRSP and TFSA summary
With so many accounts and combinations as part of these accounts to consider when it comes to RRSP and TFSA management, I can appreciate this is a puzzle for many to navigate.
In closing, consider the following for how and when to withdraw from your RRSP or TFSA:
- Be strategic with RRSP/RRIF income – this way you can strive to smooth out taxes and withdraw your RRSP/RRIF assets in your lowest income years for as long as possible.
- Consider winding down taxable accounts, slowly, since dividends and capital gains is an efficient form of taxation.
- Avoid hoarding all RRSP/RRIF assets until your 70s, when you are forced to generate RRIF income or annuity income. You might pay more tax in your senior years by hoarding RRSP/RRIF assets until your 70s.
- Leave TFSA assets intact for as long as possible.
- Delay CPP or OAS or both for inflation-fighting longevity risk.
With my guidelines in mind, while these will not apply to every retiree or semi-retiree, I think you’ll be in a fine place to minimize taxation, maximize income needs, avoid OAS clawback issues (if in doubt), provide inflation-protected longevity to your portfolio, and help your estate planning needs.
I look forward to sharing some detailed case studies about these points above over time on my site to help you and every Canadian make the most of our your DIY retirement planning.
Further Reading beyond How and when to withdraw from RRSP and TFSA:
Should you consider deferring your Canada Pension Plan?
Here’s when you should consider taking your Canada Pension Plan (CPP).
Consider taking the commuted value of your pension, if these elements apply.
What is OAS and how to avoid OAS clawback?
A reminder if you stick to any “4% rule” you might finish with almost X3 wealth on top of a lifetime of spending using the 4% rule. Don’t save money only to hoard RRSP/RRIF money forever!
Instead of focusing on the 4% rule, you can drawdown your portfolio via Variable Percentage Withdrawal (VPW).
An article about creating a cash wedge as you open up the investment taps.
This is my personal bucket approach to earning income in retirement.
Image source: www.TaxTips.ca
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Hello Mark
A question:. When tax planning RRIF withdrawals, can the financial institution follow my instructions to withhold tax on the entire withdrawal, including the minimum and any excess? Just wondering about avoiding the ultimate tax bill , at April 30, and the imminent installments to CRA.
Hi Diane,
No withholding tax with RRIF minimum withdrawals, rather, you take the income monthly, quarterly, semi-annually, etc. and then you claim / report that income when you file your taxes in the spring/each spring.
I haven’t looked into any withholding work by the institution though, on purpose, not sure if they can do that on min. RRIF schedule. What does your institution say on this?
Mark
Hello Mark and Diane,
Yes, you can instruct your financial institution to withhold tax on your minimum RRIF withdrawals. You can decide on the percentage and ask them to apply that as a withholding tax. That’s what I have done with Scotia Itrade. I started my minimum RRIF withdrawals last year and didn’t have any tax taken off. Well, at tax time this year I learned my lesson. Both, my wife and I are very fortunate to also have defined benefit pension plans so in conjunction with RRIF withdrawals tax owing on my return was well over $3,000 on my tax return. When this happens two years in a row (owing more than $3000) CRA will automatically put you on an installment schedule starting with the first scheduled payment in September, followed by the next one in December, etc. That’s why on the advice of my tax professional I asked ITrade to start withholding tax (30% in my case) on my minimum withdrawals to avoid future instalments imposed by CRA. By the way, they already flagged it to me in their Notice of Assessment for 2022. As I said before I have a good defined benefit pension which in conjunction with my minimum withdrawals takes me into higher tax bracket. It’s all a result of saving diligently and somewhat successfully in me RRSP ( now my RRIF) and then getting a job later in my working life with a good defined pension plan. As Mark says on this forum it’s a good problem to have and I am not complaining. I know how fortunate both my wife and I are. But having said that, I would still prefer to avoid tax instalments.
Good tip, Jack – a bit of pay now (via withholding) or pay later via installments.
Nice to know more brokerages are offering that although all brokerages are not created equal.
“I started my minimum RRIF withdrawals last year and didn’t have any tax taken off. Well, at tax time this year I learned my lesson. Both, my wife and I are very fortunate to also have defined benefit pension plans so in conjunction with RRIF withdrawals tax owing on my return was well over $3,000 on my tax return.”
Yup, basically, they want installments when over personal or corporate taxes owed > $3k.
Jack, indeed, kudos to saving and investing so well that you have a tax problem to navigate – again, I know that’s a bit of a pain but you’re very fortunate and I know you mentioned that. Well done 🙂
Mark
Hi Mark , I’m reading all of your old posts . Decumulation is the most complicated piece of our journey , if you can please revise your intentions and how your going to move into retirement . I personally thing to start with the Corp and move to rrsp and then to tfsa . I fo r have any non registered accounts other than my Corp. Never seen a reason to move more money out that could not be sheltered. Again thanks for your posts and I look forward to reading more .
It is, for sure, without question Jeff.
Here is a good post if you haven’t read it yet.
https://www.myownadvisor.ca/financial-independence-update-april-2021/
I will update that, this year.
With the corp., I will drawdown that first, over a period of many years. Then, a blend of non-reg./RRSPs, then finally TFSAs.
That order is “NRT”:
https://www.myownadvisor.ca/overlooked-retirement-income-and-planning-considerations/
I look forward to posting more!
Mark
I have 2 LIRA accounts, and would like to ‘unlock’ the maximum amount allowed, then transfer the funds to an RRSP. Would the amount that can be ‘unlocked’ apply to each LIRA account, or only to one of the accounts
My understanding is you can “unlock” all LIRAs (if you have more than one) if your province allows. I would have to confirm that though with any provincial or federal pension legislation!
Hope that helps Jackie!
Mark
Jackie, my wife had a LIRA, and under Manitoba’s pension legislation she had to put 100% of the LIRA into a LIF and immediately make a one-time 50% transfer, (Once-in-a-Lifetime Unlocking), to a Prescribed RIF (PRIF). To do this she had to wait until she was age 55. The funds could not be transferred to a regular RRSP. However, whereas the LIF has annual minimum and maximum withdrawal limits, the PRIF only has a minimum limit. Once established, the PRIF works just like a RRIF. One big difference being that you cannot convert it back to an RRSP, which I understand can be done with a regular RRIF provided your under age 71.
As Mark said, you need to look at the rules that apply to your pension.
My wife’s LIRA was in Questrade, and to go from the LIRA to a LIF and PRIF was not straight forward. After several attempts trying to sort it all out via the chat, we gave up and put exactly what we wanted in writing i,e. on paper, and that got the job done.
Thanks very much Bob and yes, lots of unique pension legislation to navigate!
Mark
Thanks Mark for your earlier reply. Bob, I appreciate that you took the time to share your firsthand experience, it’s helpful. This along with further research, I have a better understanding of the do’s and dont’s as it applies to Ontario. One thing for sure, they don’t make it simple. The main thing is that I didn’t want to be forced into regular minimum withdrawals by doing the one time ‘unlocking’. It sounds like this is possible if the remaining ‘unlocked’ funds are moved into a PRIF, another locked fund
All good Jackie. Not tax advice, but a reminder that you don’t have to “unlock”. It’s an option. RRSPs are generally speaking, more flexible than any LIRA or LIF. Meaning, you can withdraw from RRSP at will before the year you must convert that into a RRIF in the year you turn age 71.
Once you “unlock” in Ontario you are essentially turning on the LIF taps.
Once an investor is ready to take income from their LIRA it must be converted to a LIF (Life Income Fund) – again, very similar to when an RRSP can be converted to a RRIF. Here in Ontario, an individual can convert their RRSP to a RRIF whenever they want but MUST be done prior end of the year they turn age 71. In Ontario, a LIRA cannot be converted to a LIF until age 55 and hence the “unlocking” possibility here.
A good source 🙂
https://www.moneysense.ca/save/retirement/lira-lif-strategies/
Hope that clarifies for Ontario vs. other provinces, with PRIF, etc. It all depends on the pension jurisdiction and that’s messy to your point!!
Mark
Hi Mark, I’ve been following you for a few years. This article is one of the best you have posted for retirees like me. We will be 67 this year. We retired at 55.
As a retiree, I can vouch for everything you have said. My wife’s RSP is finished. I have less than $100k in my RSP. Our TFSA’s are both in the $150k range. All the stocks we have are dividend payers and are DRIPPed. Sold the last ‘growth’ stocks a few years ago.
A couple of things to add to your post. At the beginning of the year, transfer from your RSP as much stock, in kind, to your non-registered account to keep your incomes under $75k each. Then transfer in stock from that account to your TFSA’s the maximum amount allowed.
I live in Manitoba. Our nursing home fees are based on family income up to about $50,000 which includes RSP withdrawals. So get that money out of there as fast as you have to. My mom had a stroke at 59 and was in a nursing home 4 years later. Every time my dad made an RSP withdrawal my mom’s nursing home fees went up and equal amount the next year. Finally my dad had enough and emptied the RSPs in one year, took a big tax hit, paid the max nursing home fees the next year. But at least he had the remainder of the money left to do with what he wanted.
My last tip. If you need money for a big trip or an emergency, think about taking it from your TFSA. It will keep you from going into the higher tax bracket in the current year. Then you can refill your TFSA from your RSP the next year keeping in mind your tax brackets for that year.
Love it. Just Tweeted out your comment.
Wise words Randy on the RRSP withdrawals.
I set up my parents RRSP/RRIF withdrawals to funnel money every January to their TFSA. They will likely spend it of course but that’s all good – they’ve earned it 🙂 I figure at least they have the chance to max out their TFSAs should they wish. Other than that, move any RRSP/RRIF money to non-registered when your income is lowest.
Very sorry to hear about your mom but glad there was enough to support her needs and your father’s as well re: “…at least he had the remainder of the money left to do with what he wanted.”
I appreciate your comment! 🙂
Mark
Hi Mark
I read your blog and reread sections of Darryl’s book. He mentions in one section not to use the DRIP strategy within the RRSP but to start withdrawing early and use it towards the TFSA which doesn’t really help if your are maxed and the amount you can put in a TFSA is small. I guess this could be the source for fuelling the TFSA. He does mention to transfer to a non registered account and then using dividend and capital gains tax strategies upon withdrawal in this N account.
You mentioned NRT as the sequencing for withdrawals. I assume you use dividends from the N account to help fuel annual income. If the R account is large would it make sense to possibly put it first or tied with N? The only issue is if you are in the top tax bracket then keeping it second may make more sense—and wouldn’t it also make sense to let it grow as much as possible tax free? Wouldn’t the growth outweigh the tax implications?
Within the R account, is this best place for the bucket or cash wedge strategy? Would one sell equities to purchase short term fixed products using a contingency plan? For example, sell equity to purchase a 1 year GIC(or short term bond or money market) then at the end of that year, cash and withdraw that GIC to use towards the annual income and sell more equity and purchase another 1 year GIC. Do you purchase the GIC within an N account or does it really matter if it stays within the R account?
This may be a stupid question but at or near retirement, can we do anything to decide which tax bracket we fall in? If one has a self employed career where they have always been in the top tax bracket, can one not make changes pre retirement to slow down and take on a significantly lower income?
Never any stupid questions Pat 🙂
I will answer a few via some thoughts.
1. DRIPping stocks or ETFs almost always makes sense, to me, RRSP, TFSA, etc. since money that makes money, makes more money.
2. If you don’t need to spend the money, in retirement, from your RRSP, then making slow withdrawals over time via RRSP could still be smart to move $$ from RRSP to TFSA and max out TFSA as you age.
3. Moving money after TFSA is maxed out, from RRSP, to non-registered, can be smart since you are moving RRSP tax-deferred money to taxable in your lowest income years. This way, you can take advantage of tax-efficient dividends and capital gains in a taxable account. I’ve mentioned this from Day 1 on my site.
See my withdrawal order and why 🙂
https://www.myownadvisor.ca/overlooked-retirement-income-and-planning-considerations/
Yes, I mentioned NRT and I will absolutely use dividends from the N account to help fuel annual income, I will do that over a couple of decades. My R account is not overly large, but I will still draw it down to smooth out RRSP taxes over time.
If you are in the top-tax-bracket while working, it would not make sense to me to make any RRSP withdrawals.
If you are in the top-tax-bracket not working, I believe it always makes sense to withdraw from RRSP when your income is lowest.
For most, the goal should be to move $$ out of RRSP/RRIF in your lowest tax years, before tapping tax-free assets (TFSA) IMO.
Hope that helps a bit and stay tuned for a few case studies this spring on my site. 🙂
Mark
Thanks.
So true on the what to do now part, even for professionals. I pretty much see them advocating 70/30 now. Maybe it will be 80/20 next year?? Ha, ya TINA.
I managed to have a good chunk of my cash invested for several years @ 2.5-3.0% while inflation was running @ 1.4- 1.7%. Even stocks have not met inflation for 40% of the time looking at the past 5 decade periods. (Saw tweet on it today). Bonds were great performers for a lot of those years! (but not now or maybe for a long time) Context matters.
I get that bias for you. I’d have it if I were in your shoes today too. My stage is somewhat different. I didn’t buy bonds until full retirement and my cash allocation until then was relatively modest- 4 mths expenses or so IIRC. I’m guessing that is quite a few years away for you. Bonds will likely not be a reasonable option then, but you’ll be better positioned to know what your cash needs/wishes and/or a GIC multi ladder will be at that time.
Yes, I think so. I think it should all work out for us. We’re saving and investing – that is the key ingredient. 🙂
Bingo. And you’re a master example of both.
Hi Mark,
Thank you for sharing and for this post. I’m still digesting your post but have a couple of questions….
Regarding unlocking LIRAs, do you know if one needs to have RRSP contribution room available when unlocking 50% of a Ontario LIRA and moving it to the RRSP?
On a separate note, wondering if you will be purchasing private health care insurance for medical and dental expenses once you leave full time work?
Thank you for your thoughts.
Not tax advice….but….what I know….read, etc.
Individuals 55 or older will be entitled to a one-time conversion of up to 50% of holdings value into a tax-deferred savings vehicle with no maximum withdrawal limits. If the funds are transferred to the locked-in funds owner’s own RRSP or RRIF, this does not require contribution room, and the owner is not taxed until the funds are later withdrawn from the RRSP or RRIF…..
Source:
https://www.taxtips.ca/pensions/rpp/unlocking-locked-in-pension-accounts.htm
On the other note:
https://www.myownadvisor.ca/what-to-consider-when-workplace-benefits-are-disappearing/
Best wishes!
Thank you, Mark, for the response. Please consider doing an updated post on what to consider when workplace benefits disappear.
Will do 🙂 What particular questions do you have?
Re questions… I notice that the guest you featured gave a sample quote and information for a couple. I would love to know what a sample quote and information would be for a single person. Also, if possible, I’d like to understand if mental health conditions impact insurance costs as much as/less than/more than physical health conditions. Thank you for considering an updated post. All the best, Mark.
Thanks JF. Will add to my to-do list 🙂
Mark
Hi Mark,
Thanks for the useful information. One other interesting rule for max LIF withdrawal in a given year also includes an additional factor. If your LIF has great investment returns, then you are allowed to take those returns out the following year. Last year’s stock market helped my LIF and my max withdrawal is 28% of my LIF account balance on Jan 1, 2022.
“ON, BC, AB, NL maximum calculations are based on the greater of a) the result using the factor and b) the previous year’s investment returns. MB LIF maximum calculation is based on the greater of a) the result using the factor and b) the previous year’s investment returns + 6% of the value of all transfers in from a LIRA or Pension Plan during the current year.
Saskatchewan Prescribed RRIF – there is no maximum annual withdrawal and you can withdraw all the funds in one lump sum.” from Mawer website document.
Great stuff.
https://www.mawer.com/tools-and-resources/investor-education/lif-2022/
Yes, I’ve used the Mawer site from time to time and other LIF information from taxtips.ca.
https://www.taxtips.ca/pensions/rpp/minmaxwithdrawals.htm
I personally think it would be great to avoid all these RRIF mins. and LIF factors myself since our tax system is overly complex to begin with.
Hey Mark,
Great post, comments and discussion from your following as always. I do need to draw down my LIF and RRSP to smooth out taxes going forward. As you mention, a tax prooblem is a good one to have. I’ve been taking the minimum out of my LIF for the past 2 years due to other income streams that have now discontinued, so planning on taking the max this year. Are there any advantages of taking some from both the LIF and RRSP? My thinking was to draw down and eliminate the LIF as quickly as possible, if nothing else, to reduce accounts to manage.
Thanks, and keep the good stuff flowing. Enjoy a green beer today!
Rob
Thanks very much Rob.
You know, I’ve thought about this as well. I have a very small LIRA to LIF mind you so my plan is to “unlock” 50% here in Ontario of LIRA (at age 55, because I can) and move 50% to RRSP for more flexibility of RRSP assets/withdrawals.
Then, I will turn on the LIF income stream tap.
At the end of the day, LIF and RRSP withdrawals are taxed. No way around it. So, I will turn on the LIF tap as soon as I can, and then figure out slowly how much to withdraw from my RRSP to “smooth out taxes” over many years, ideally killing off my RRSP by age 70 before CPP and OAS kick-in.
That’s my current thinking.
I had a post about my LIRA and what a fee-only-planner thought about the LIRA below, even though I didn’t agree with his bond-like LIRA approach 🙂
https://www.myownadvisor.ca/what-is-a-lira-and-how-should-you-invest-in-it/
Thoughts?
Mark
Mark,
Appreciate the quick reply. I did take advantage of the “unlock” of 50% of my LIRA and move to my RRSP, just gives you more flexibility I thought. My LIF (all low cost US ETFs) does not exactly mirror my RRSP, as my RRSP has some Canadian and international also. My thinking is depending on how the markets fluctuate, I can sell either US, CDN or international from my LIF or RRSP as it makes sense. Of course only a plan, we’ll see.
Thanks,
Rob
Ha, yes, my usual answer on all my stuff is “it depends” 🙂
Great stuff Rob, you’re definitely thinking things through very well and detailed.
Mark
Wow, such a helpful and knowledgeable post. Your situation is pretty complicated too, at least much more complicated compare to ours. Ours is pretty simple: taxable, RRSP, and TFSA. The plan is never to touch TFSA. TFSA and the house will be the inheritance our kids get from us.
We will begin to withdraw from RRSP right after retirement for sure. Most likely more than we need to smooth out the tax. Taxable account right now generates a decent amount of dividends.
It’s likely we might have other income from our taxable margin account in retirement too. I am still playing there. I have 200 shares of MX which I was hesitating to sell or not. So instead of selling it, I sold two hands of calls. On the option expire date, the stock price is higher than the strike price and I rolled over the call. I collected $625 premiums in total. It’s like 5% extra yield. But of course not all stocks can be played in this way.
Very wise, to smooth out taxes with RRSP/RRIF withdrawals and keeping TFSAs (at least considering it) “until the end”. We’ve seen the benefits of this via work with clients at Cashflows & Portfolios.
How many stocks are you doing covered calls with?
Mark
Only the 200 shares of MX at this moment. I normally don’t write covered calls, just when I am hesitating to sell or not. Meanwhile, I also write couple puts if I think the price is low. I have puts on MSFT and PYPL right now.
Gotcha 🙂 Keep me posted on your progress!
My 200 shares of MX were called away. If I didn’t sell the call, but just wait until last Friday to sell it, I will get a little bit more. But the thing is, If I didn’t sell the call, I might already sold it when it’s 62.
Next step is to sell 2 hands of put when the price of MX comes down a little. I will report here when it happened.
Interesting. What you expected? Called away? 🙂
Mark
I was prepared for both, either way I am OK. If not called away, I will continue to sell calls. If called away, I will sell puts.
Ha. Yes. You are very resourceful 🙂
Mark
Hi Mark,
Thanks for these articles as always. I have a question my company is offering RRSP contribution plan this year and will be topping up 3 to 4% on top of my contribution so that’s the good part but the bad part is they have chosen a company for (a famous one) but they come with super high MERs of 1 to 2% and their fund performance sucks, I can have better returns probably with simple Vanguard funds. So I guess I will have to go with them since the company has chosen them is there any workaround with that? I am really not interested in paying into this employer’s RRSP contribution scheme but this high fee plus poor performance of their fund is really putting me off. If I don’t contribute to it am leaving money on the table.
Most welcome Z.
Yes, get out of those higher priced funds if you can. Do you see this?
https://www.myownadvisor.ca/how-and-why-to-ditch-your-expensive-mutual-funds/
Calculator(s) here:
https://www.myownadvisor.ca/helpful-sites/
I would definitely contact your RRSP administrator to ask why these funds are only available and why there are not any lower fee alternatives.
Taking the “free-money” via RRSP matching is great however but where you can, find the lowest cost and most diversified products you can.
Let me know what your RRSP administrator at work says 🙂
Mark
Mark, I started down the road of de accumulation almost 10 years ago. I retired at 55 and my wife at 53. I’ve learned things as the years passed but this is where I am today. I have a pension that basically covers utilities and groceries which I started at 55 and split that income with my wife. I first max out my LIF withdrawal which can be pretty good based on prior years returns. Than we calculate how much to pull out of our RIFs based on the tax bracket we want to be within. The majority of the time we do a transfer in kind to our margin account and live off of dividends. Approx 75% of our holdings are in margin and TFSAs now. We also pull all dividends out of our TFSAs monthly but always so far put it back in with the annual amount every January. I did turn the DRIP off on our Margin and TFSA accounts so we could pull all dividends out. I’m basically 100% equities and do not trade in the accounts unless I need to do some housekeeping. I do have one margin account that I play with and use a secured line of credit to do all purchases and deduct the interest. I’ve been doing this for 30 years or more after reading an article or book called how to write your mortgage interest off. We have no plans on collecting CPP or OAS until we have to. We live very comfortable and travel as much as possible. That’s it, always seeking better ways to manage taxes. Your thoughts?
Great information Denis.
I’m going to try and write a post about RRSP > RRIF, etc. in the coming weeks. I’ll put my thinking cap on regarding how to offer a bit of a case study per se!
I like the idea of pulling out $$$ from RRIF to be mindful of taxes, avoiding the next/higher tax bracket. I’ve always considered earning
less than $75k per person, is a good “sweet spot” for taxation – depending on what one wants to spend in retirement.
The combined Feb. and Provincial tax in Ontario for earning < $45k per person is just 20% on "other income". Capital gains is half that of course and eligible dividends are -6% tax 🙂 https://www.taxtips.ca/taxrates/on.htm
This makes any slow RRSP/lower RRIF withdrawals over many, many decades ideal since other assets in a taxable account can take advantage of lower capital gains and the Canadian dividend tax credit. I’ve often found it’s not always how much you’ve saved your investments but where you save it to be tax efficient.
We also have no plans to collect CPP and OAS until age 65 for both, and hopefully age 70 if we can pull it off 🙂
Mark
I contribute to my TFSA in January from my withdrawal from the RRSP/RRIF in December.
Gotcha, smart to keep the timing close. My parents have their RRIF withdrawals at the start of the year, as to transfer anything in Jan. each year from RRIFs to TFSAs as they wish.
Excellent post Mark, as always. Thank you. As you often say, these are “good” problems to have.
Our RRSP assets are a small portion of our nestegg (10% ish). Due to (and thanks to) a sizable DCPP which I will not start to draw until 65, our plan is to completely spend our RRSPs between 60 and 65.
I know you dont give advice but perhaps you or some of your readers can add a comment. I’m wondering if it’s worth converting RRSP to RRIF at all? We will not benefit from splitting or pension credit due to our ages.
Thinking of simply “cashing” 20% of the RRSP value each year, which would be far more than the minimum required, paying the taxes and spending the balance.
Am I missing any hidden value in RRIFs?
Thanks as always
Chuck
Hi Chuck, One benefit of converting to a RRIF versus making RRSP withdrawals is that your financial institution may not charge you the RRSP deregistration fee of $28.25 per withdrawal. Not big dollars but that’s the only benefit I can think of. Check with your financial institution if that is the case if the fee is a factor for you. Looking forward to hearing others thoughts on this. All the best to you.
Thanks JF and Mark.
Besides the small fees to deregister, Im not seeing much need to convert. I will do so with my Pension at 65 of course. If you have any more on the topic Mark, Im all ears!
Thank you again
OK. Let me consider a post about that. I’ll need a few weeks but will ponder 🙂
Mark
Ya, I don’t see any big issues with RRSP to RRIF. I mean, there are some deregistration fees sometimes with RRSP to RRIF conversion but essentially a RRIF puts part of your portfolio on autopilot with organized and systematic withdrawals.
Ya, no advice of course as you know but I can play around with some software and write a post for you if you wish 🙂
I can see if a blogpost about drawing down RRSP over 5-10 years is worth it vs. RRIF. RRIF withdrawals will qualify for pension income splitting I recall after age 65, so ages 65 oto 71 are a good sweet spot for starting a RRIF for that reason.
You also don’t need to convert the entire RRSP. You can do 50/50 if you wish. RRSP strategic withdrawals and start 50% of your RRSP into a RRIF for pension income splitting.
Cheers,
Mark
I have our RRSPs with RBC Direct Investing and if the total amount is above a threshold, I believe it was around 400k, you become a member of a “club”, Royal Circle I think it’s called – I’d have to go look it up, But anyway, they waive certain fees if you are a Royal Circle investor, including RRSP deregistration fees. You should check with whomever you are using for your investment accounts to see if they will waive these sorts of fees. So I might leave the funds as RRSPs until we turn 71 since we can draw from them only subject to normal withholding tax. On the other hand, RRIF conversion automatically makes all withdrawals fully income split-able as pension income, so I may turn them to RRIFs anyway. In Ontario, the biggest bracket jump happens at about 46k, from 20% to 24%, then to 30% at around 55k of income. Our total pension/investment income will come to about 110-115K, probably more than we will need most of the time. But we will draw a minimum of from our accounts in any year sufficient to bring our combined gross income to 92k, regardless of how much we actually spend, to maximize the 20% bracket headroom. Surplus funds would go into a non registered trading account and invested in dividend stocks for the tax free income. I’m currently retired living off a DB pension, and bit of funds from a LIF, and my wife’s salary. She’s quitting next spring, and we’ll finally start to draw from our investment accounts.
Great stuff John, yes, I’ve heard of RBC Royal Circle and a good assets under management per se plan that Royal Bank has. I recall TD used to have something like that but I don’t believe they waive any deregistration fees. I would have to check if Questrade, CIBC Investors Edge, etc. do the same.
Yes, I use taxtips.ca for my planning on tax brackets.
https://www.taxtips.ca/taxrates/on.htm
It is our hope our total income in semi-retirement (including part-time work) can be about $80k or so per year. In full retirement, hoping for about the same which could be sustained for inflation at 2-3% for the coming 40 years until our 90s.
Our basic needs (food, shelter, transportation) are in the range of $4k-$5k per year or max. $60k per year.
This makes the $20k per year “extras” on top of that.
I will be surprised if we have much RRSPs left at age 71. I want to move any money not needed from RRSPs to taxable or TFSA in the coming 20-30 years to turn those assets into tax-efficient (taxable) or tax-free (TFSA).
Congrats your wife quitting next spring, exciting times for you and the next chapter. I look forward to doing the same in a few years hopefully by early 50s moving into part-time work.
Mark
Hey Mark
Beauty of a post. You have so many things to consider and some of it sure seems “tricky”. Good luck with it all.
Our case was/is much simpler but some of it may be of use to some other people (I know you know many of these details already but worth repeating for others). I’m 69 and have been fully retired for almost 9 years without any company pension. My is 65 and was stay at home so minimal CPP. We are 100% TSX dividend income/growth investors and have way more dividend income than we need.
Here’s some other key points:
– we made a noble attempt to try and drawdown our RRSPs. My wife has a spousal RRSP that is slightly larger than mine. We made withdrawals from both after I retired until I converted my entire RRSP to a RRIF at age 65. The “nice” problem we had was that the RRSPs kept growing faster than we could withdraw.
– as mentioned, I converted my entire RRSP to a RRIF at age 65 using my wife’s age for the lower withdrawal%. I did the entire RRSP to make portfolio management and income splitting easier.. We probably would have been better off just converting a small amount.
– I took CPP right at age 60 and OAS right at 65. My wife has started hers at 65 as well. My thinking on this is OAS isn’t guaranteed and I suspect is going to have rule changes in the near future with the government fiscal mess. Also, we are only going to get small clawbacks until my wife has to convert her RRSP to a RRIF and then the clawbacks will become very significant. We’ll do that when she’s 71 and then take the minimum withdrawal%. That gives me 11 good OAS minimal clawback years and my wife 7. In those years, I am taking the minimum RRIF withdrawals and my wife has stopped any RRSP withdrawals. Basically, this means all the hard thinking for us is over and done with and it’s total auto-pilot.
– I totally agree that the TFSA is terrific and the best of all the account types. I sure wish it would have been around for longer. I also wish I had stopped contributing to our RRSPs a couple years earlier than I did.
– Our total portfolio keeps growing and growing even with the withdrawals for our expenses. In fact, we hit another all time high last Friday. We are very happy to leave a large inheritance and also have been doing some significant early inheritance gifting to our two kids We also have an investment account for our 5 grandkids.for when they graduate high school and they will be free to use the dough however they desire. This makes portfolio management/drawdowns incredibly simple as we’re not worried about leaving too big an inheritance.
Anyway, as mentioned, great post and good luck with your many decisions. I’m looking forward to hearing what you do at each stage.
Ciao
Don
Great stuff as always Don.
I think all retirees should at least consider what you said/what I wrote: try and make a noble attempt to drawdown the RRSPs.
The benefit of converting some or all of RRSP > RRIF is income splitting for sure. As you know, nothing says you have to convert the entire RRSP to a RRIF.
While OAS isn’t guaranteed, I will likely hold out to age 70. I’m sure they will change the rules in 25 years when I get there anyhow 🙂
The TFSA is an absolute gift of an account.
Congrats on the all-time high and gifting to your family. I think you are very wise to do that while you are alive!
Mark
PS – keep you posted on my decisions. A few things for me to consider. Ha.
Nice update Don. Fantastic job.
I laughed when I read your noble attempt at reducing RRSP levels, them growing and hitting an all time accts high last Friday. Similar deal here and I’ll be hitting 8 years retired in another month and a half. I need to get more aggressive on withdrawals but the tax implications bug me, but its now or almost certainly more later otherwise. Waiting on CPP and likely OAS too until after 65 and likely at or closer to 70.
Take care.
Ever growing RRSP is a good problem to have.
Still, I will try to be brave to withdraw enough to melt down our RRSP once retired. Almost for sure we have to withdraw more than we need in order to achieve that. I can imagine it will be pretty hard to pay tax unnecessarily now.
I’m going to knock mine down more aggressively, with another withdrawal this yr, and pony up on the taxes. Its very possible the market will decide to change the ever growing RRSP thing.
Hey Rbull
Thanks on the comment.
My thought process on drawing down the RRSPs was to reduce life time taxes (including the estate) by paying more now. Also, I figured it’d help out with avoiding/minimizing OAS clawback.
Given both my wife & I are now collecting OAS, we’ve bailed on the idea of drawing down and are just going to take the minimum RRIF% for me now and for my wife when she turns 71/72. It means more taxes life time but it’s now on the estate and I’m sure the kids and grandkids won’t be complaining when they see the size of the after-tax inheritance. 🙂
Take her easy
Don
Hi mark. I agree with your strategy but I have one comment for you to reconsider. I learned the hard way that if you take out an annual withdrawal from your RRSP early in the year, you usually pay too much withholding tax on the withdrawal and then you have to wait until you file your tax return to get the refund. I now make the annual withdrawal in mid December and get the refund in March. Just food for thought. Good article.
Thanks for those insights Jan. Interestingly though too, if you take more than you need for RRSP withdrawals early in the year, you can also fill up your TFSA at the same time/near the same time.
Thoughts on that?
I do see benefits of RRSP withdrawals later in the year.
This is my thinking too Jan. Also, any funds destined for the TFSAs are kept in the market through in-kind transfers, first to our non-registered accounts, and a few weeks later (in January) into our TFSAs.
Thanks. I forgot to mention that part. I haven’t found a more effective or efficient way.
An invaluable piece of work, Mark.
I have been retired 25 years from a government job. My only comments are:
Do not retire before age 55, and use your RRSP to bridge the period between retirement and onset of CPP. Steady, indexed streams of income are the cornerstone of a safe retirement plan. Keep them intact!
Thanks Douglas!
I hope to work part-time in my early 50s, and bridge the income gap between early 50s and age 55 when our pensions might kick-in.
You don’t think I should consider commuting my pension? Thoughts?
Mark
Hi Doug, can you clarify your “Do not retire before 55” advice? Does this have something to do with government jobs and pensions, or is there another reason you’d made such a hardline cutoff?
My wife and I are 48 and looking at 52 as “our date” as that’s when our last child hits university and we can consider being somewhere else. I definitely plan on drawing down RRSPs as early/tax advantaged as possible…the whole point of them was that taxation arbitrage after all!
Wow Mark –Your situation is very close to mine and I came to similar conclusions.
DB pension, just started at 55 = $30K a year.
– I was considering commuting before 55 but they adjusted the commute formula in 2021 and commute value went from $700K to $550K…grrr.
– The pension advisor pointed out each year I waited after 55, it went up 3% or so but with Inflation over 3% I might as well take it and simply invest if I did not need it.
– Pension Income splitting applies at 55 for my type of pension plus we each get the $2000 Credit, so add only $13,000 Income for me and my spouse.
LIRA
– We did commute my wife’s pension in 2020 so that gave us a decent LIRA,
– In my province at age 55 we can move half of it to an RRSP then have LIF program imposed on the rest. So that is the plan.
PT Job
– I work a PT job and likely will continue to keep engaged and that pulls in $8-12K a year.
Dividends
– We keep a healthy balance invested in Canadian Dividend stocks and ETF’s in our Cash portion of the account. That generates about $20 K in Tax efficient dividends.
RRSP Plan
– Take out enough from each of our RRSP’s to add money to TFSA each year.
– Take out enough to live the way we want to.
– Take out any extra based on Tax optimization and add to Cash account.
– Take it out late in the year, December so the excess withholding Tax is returned by April the next year.
CPP\OAS
– If RRSP returns are sub par and it is declining take CPP\OAS at 65
– If RRSP remains a horn of plenty then we can delay CPP\OAS as a safety measure (or not)
I prefer to have more in cash account for a big purchase if need. Just more life flexibility
– By owning your house you do not need the income to rent, this lowers your tax on income as you do not require as much income.
– Our lifestyle seem to be coming to $4000-$5000 per month, trips and fun included.
– Taxes could be our largest expense so it does become a focus.
– Cash account is all Canada and all Dividends so Registered accounts are ex-Canada for diversification.
Good Canadian blog where he talks about the psychology of things in early retirement.
http://www.canadian-dream-free-at-45.com/
Personally the big surprise for me is how long, cold, dark and limiting Canadian winters can be. It is a problem we are going to need to ameliorate in the next five years.
Great stuff BK!!
DB Pension – yes, not sure, as per post. I have to mull over for sure….thinking of commuting to be honest pre-55.
I will do some pension income splitting using our RRIF eventually.
LIRA – yeah, mine is very small so will “unlock” where I can and same, can move 50% to RRSP at LIF the rest.
PT Job – yupper, want to keep my mind active too.
Dividends – we hope to have about $30k flowing in (half taxable, half TFSAs) in the coming years.
RRSP Plan – we figure slow withdrawals as per post, in 50s and 60s, will help smooth out taxes. We won’t touch TFSAs until we need to and therefore can defer CPP and OAS for higher bond-like, inflation-protected income 🙂
Yes, I’ve met Tim years ago and he site has been a good early retirement one in Canada to consider following!
Thanks for your comments!!
Mark
Pension Commute or Not:
2020 Formula gave $730K total with $400K to LIRA rest taxed and to cash
2021 they imposed changes to pension formulas so $530K total , with $330K to LIRA and rest taxed to cash.
Or $30K a year 1/3 reduced upon death of spouse.
We had commuted Wife’s pension the year before so under the wire , but as I had a good chunk in the markets I thought the pension would allow some guarantee. Three legged stool etc.
Hard decision. As I was angry about the changes imposed with no notification….
“I am altering the deal. Pray I do not alter it any further.” – Darth Vader
That’s the thing BK, I have no RRSP room. So, I will likely need to take some as taxable income. Not great. Sigh.
$30k a year even without death benefit @ 6% guaranteed income = $500,000 invested equivalent. Rough math.
Not trivial 🙂
Mark
DB commuted values are going to be hit further as long-term interest rates rise. The golden days of the golden payouts might becoming to an end, or perhaps just downgraded to silver. Regardless, it’ll all come down to the calculation on the day.
Oh I agree. My DB pension is secure but partially underfunded. If I leave my employer before age 55 (likely) then I will need take it, throw it into a LIRA and LIF re: take commuted value. I’d be OK with that.
I’ll keep you and others posted 🙂
Mark
BK. The most honest words most employer’s can deliver to their employees is “it’s nothing personal”. It certainly applies to the changes with the commuted values. Many DB commuted values took a hit when the legislation changed in 2020 as a way of protecting the pension plans. I’d be surprised if any plan administrators advised plan members of the impending change. There would likely have been a rush for the door, and the exiting money may have done some damage to the funds, and/or increased the employers required contribution.
Yes, it was not about me:).
I had heard talk of an adjustment to the formula however I was thinking maybe a five figure sum decrease not a 25% haircut.
My wife had an interesting perspective; she said if they can do this arbitrarily now what might they do should they run into trouble when we are 85 years old?
No man is an island so always good to be diversified in retirement income.
This article is the holy grail, the golden fleece!
Thank you for sharing.
LOL. Most welcome. I owe you some emails Pat 🙂
Pat, I second that sentiment!
Nice article Mark. It’s my opinion, that the TFSA should be the last account to withdraw from, while continuing to contribute the maximum allowed to it.
Yup. The TFSA provides so many great reasons to preserve somewhat “until the end”. I appreciate your comments.
Mark
Writing from Belize this morning!
We are in our 8th year of retirement and doing well in the “withdrawal” process. Not as calculated as your plan ( and congrats on that) we use a more overall approach.
I believe the most important factor in investment is being “Self Directed”. Totally agree with your 4% thinking. A DIY investor can easily withdraw 6% and more and still increase principal in most years.
Outstanding Paul. We love Belize as well. In San Pedro, other?
I hope to remain very “self directed” to your points throughout semi-retirement and for the most part, ignore the 4% rule thinking since it doesn’t really apply in practice although a decent starting point for many to build from.
Have fun in the sun – very jealous!!
Mark
Mark, a well thought out plan and great insight for others looking ahead for their own strategies. Smart to have a deccumulation plan established in advance. Possibly your biggest decision will be with your own work pension if indeed you have choices with it at the time.
Our current retirement funding and plan is following a similar process and order to what you describe, sans the corporate acct I exhausted years ago, and my LIRA having been converted to a LIF about 4 years ago. We too are not concerned with leaving an inheritance.
All the best on your journey.
I think you’re right re: work pension. Based on my terms, I have a big this-or-that decision in the coming years. I’m leaning on commuting with interest rates remaining very low but I really don’t know yet. I need the math from my pension administrator and sadly they won’t share that at all with me until that is time…which is annoying 🙂
I appreciate your insights and experience since I tend to learn a lot from others that have “been there, done that”. 🙂
Mark
Good stuff. I can see how not being able to to that pension math now would annoy you!
We looked at the commuted value of my wife’s pension but I can’t find the details of it now nearly 11 years later. I recall the decision for us wasn’t too hard to take the reduction, and the penalty to retire early with the pension ‘big bond’, vs the payout then and managing another pile of assets. Its been very good to us and I like the combination of that, our own assets and eventually more ‘big bonds’ from CPP/OAS.
On an aside I’m back to having issues seeing reader comments with my regular firefox browser. Can’t.
MS Edge is ok, but I don’t have all my stuff stored on that.
Very smart Deane to say the least! Yes, always been a fan of the ‘big bond’ and still unclear what I will do with the pension at work. I will keep you and other readers posted!
Hummm, good to know about reader comments. Sigh.
As in you can’t see them at all? They show up fine here but let’s monitor…I didn’t change any settings but can investigate of course.
Mark
Thanks. Her ‘big bond’ unfortunately is deteriorating and has a large unfunded liability. There are also now more retirees than employed contributing, and those that are working pay a ton. A board of 3 pension experts is studying it and making non binding recommendations by July. I watched their initial presentation and the future does not look bright. I thought about it and have 4 ideas/outcomes in my head so we’ll see what they come up with.
We’ll see how smart it was.
All is working fine now Mark, even on firefox.
Good to know about site 🙂
Gosh, pension viability is likely going to be an issue for our company (many companies…) and while my pension is modestly funded now, I do see my employer and employee contributions going higher over time which has always made me believe that with demographic shifts and more factors in the future at play, I’m better off communting if I leave the full-time workforce before age 55.
Conservatively, 20 years into a decent (definitely not gold plated) DB pension should be worth about $400k now. That $400k would be about $20-25k or so per year, in a LIF income stream as cash for life from age 55 when I would tap the LIF until my 90s. That’s a pretty good base.
Again, lots of thinking to do but that’s a great problem to have. I like having choices. Ha.
Yes, understanding the current and projected status of the pension is definitely important. You’ve nailed the issues and I’m sure will consider carefully at the time. Fortunately here all our eggs aren’t in one basket and some change to the pension (if it even happens) will be far from crippling us, and a lot of money has already been paid out here. The bridge benefit goes away too in several years.
Yes, that’s a good base if you can generate that and are comfortable with it on a risk adjusted basis. Pensions and balanced investors everywhere likely will be challenged with returns going forward with rates low and rising. Seems risk is likely to rise as they will seek alternatives to traditional FI such as private equity, real assets etc.
Increasingly I see taxes as being a drag, with a public and govts that love to gorge on debt and more social programs, and with costs of those likely to rise.
Yes, a decent base ($400k) but I fully see where some pensions/balanced investors in the traditional 60/40 mix will struggle in the coming decades. The bond bull-run is over IMO.
So, more equity risk is the way to go.
Cash is still VERY valuable but a long-term loser to inflation. Keeping 1-2 years though is more than fine to offset higher % equities. That’s just my hedge and I would not be in too many bonds for sure.
It seems more traditional 60/40 investors are moving up the risk scale. It will be interesting to see how that works, and if any struggle is in the bond or the equity markets, or both. Maybe govts and CBs will continue forever juicing the markets. I’ve held some bonds for the past 8 years and done fine by them but that era seems over and I’m out of them now. Bonds have been destroyed by CB’s and QE. TINA rules for now. Investors in the accumulation stage don’t need bonds unless they’re very conservative, and they probably have to accept negative returns for possible shock absorber and rebalancing benefits. But they have increased risk with massive govt debt underlying that ‘asset’.
Cash may be a long term loser to inflation but also may provide an offsetting boost opportunity when markets zag, and a nice sleep at night factor for some retirees. The amount if needed or desired will vary greatly based on a lot of factors.
It is interesting right? The 60/40 was touted SO long by professionals and now they don’t know really want to do 🙂
TINA, ha, yes.
I’ve giving cash a lot of thought, as you know, so I landed on my cash wedge bias (not the GICs and such) to ride out market volatility while staying 100% or as close as I can to 100% equities.
https://www.myownadvisor.ca/the-cash-wedge-managing-market-volatility/
I know you know this 🙂
So, yes, while cash may be a long term loser to inflation it is an essential tool in the toolbox with bonds earning next to nothing. You can do great things with cash:
1. Use it to ride out 1-2 years of bad markets without touching the equity part of the portfolio.
2. Use it to be strategic and buy more equities when on sale (i.e., energy last year, tech this year in 2022).
3. Use it for any unexpected emergency in retirement when you cannot afford to take a major withdrawal.
I dunno. I know I have my biases but I see very practical reasons to keep a cash wedge and be much higher % on equities than just 60%. I’ve though this way long before bonds ended their bull run.
Great comment.
Mark