In this second installment of planning for the decumulation phase of your life, we discuss how to minimize the portion going to the CRA so that you may enjoy more of the money you’ve worked hard to accumulate.
Which Accounts Do I take Money Out from First in Retirement?
If you hold investments in both registered and non-registered accounts and you are nearing your retirement, you may be wondering which accounts to start withdrawing money from first to fund your retirement needs.
This will involve strategic planning to optimize tax benefits, manage investment growth, and ensure financial stability. Here are some considerations and strategies to help guide your decision.
1. Understand Account Types
- Registered Accounts (RRSP, RRIF, TFSA): Withdrawals from RRSPs and RRIFs are taxable at your current income rate, whereas TFSA withdrawals are not taxed.
- Non-Registered Accounts: Income from these accounts might be subject to capital gains tax, dividend tax, or other types of income tax, but only on the earnings or capital growth, not the principal.
2. Consider the Tax Implications
- Marginal Tax Rate: Withdrawals from registered accounts are added to your income and taxed at your marginal rate. Managing withdrawals to stay within a lower tax bracket can save money.
- Tax Efficiency: Non-registered accounts benefit from tax-efficient investments (like Canadian dividends or capital gains), which are taxed at lower rates than regular income.
3. Plan for Required Minimum Distributions
- RRIF Withdrawals: RRIFs have required minimum withdrawals starting the year after you convert your RRSP to a RRIF or reach age 71. Plan these withdrawals carefully to manage your taxable income.
4. Evaluate Retirement Income Needs & Sources
- Income Sources: Consider other sources of income like pensions, OAS, or GIS. Withdrawals should complement these sources to meet your monthly budget while minimizing tax liabilities.
- Liquidity and Flexibility: Non-registered accounts generally offer more flexibility without tax penalties, which can be advantageous for unexpected expenses.
5. Long-term Investment Growth
- Preserve Tax-Advantaged Space: Since registered accounts usually provide a tax shelter for growth, it might be beneficial to preserve these accounts for as long as possible to keep the investments growing tax-free.
- Asset Location: Consider which types of investments are held in each account. High-growth investments might be better suited in registered accounts to defer taxes on gains.
6. Succession and Estate Planning
- Estate Taxes and Beneficiaries: Registered accounts typically have named beneficiaries and can bypass the estate and probate process, which might not be the case with non-registered accounts.
7. Consult with your Foster & Associates Advisor
- Expert Advice: Each retirement scenario is unique, and rules can change. Consult with your advisor who understands your personal situation and the latest tax rules.
A balanced approach, often withdrawing from both registered and non-registered accounts in a tax-efficient manner, can optimize your retirement funds. It’s about finding the right mix each year to minimize taxes, meet income needs, and maintain an appropriate investment strategy. At Foster & Associates, our financial planning team can work with you to model various strategies to ensure that you maximize your after-tax income and estate value.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
