How to Withdraw from RRSP and TFSA in Retirement (tax efficiently)

May 16, 2016

Sandy Martin, a fee-for-service financial planner and former banker, dives into the intricacies of tax-efficient withdrawals from RRSPs and TFSAs during retirement. She stresses the importance of customized planning tailored to individual financial situations. Topics include managing tax brackets with RRSP withdrawals, the impact of continuing to work during retirement, and strategies to mitigate sequence of returns risk. Sandy also explains the differences among pension plans and how to set realistic return expectations, helping listeners navigate their retirement savings effectively.

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ADVICE

Smooth RRSP Withdrawals Early

Convert RRSPs to a RIF and start withdrawing once employment income drops to smooth taxable income over retirement years.
Pay tax gradually while your income is lower to avoid large taxable spikes at age 71.

ADVICE

Treat TFSA As Your Flexible Backstop

Use TFSA funds last because they have no mandatory withdrawal deadline and grow tax-free for contingencies.
Keep TFSA investments aligned to risk tolerance and use them for one-off needs like equipment or care costs.

ADVICE

Coordinate Spousal Withdrawals

Aim to keep each spouse's taxable withdrawals within the lowest tax bracket when possible.
Top up spending needs with TFSA withdrawals to avoid pushing taxable income higher.

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When it comes to the Build Wealth Canada show, there are 2 questions that I get asked more than any other.

The first is how to actually buy ETFs, so how to actually be an index investor, what tools to use, which ETFs are great ones to consider, and how to actually do it step-by-step. So that’s why I built the course (to basically answer this question). If you're interested, you can check it out at www.BuildWealthCanada.ca/invest

Now the 2nd question that I get most often is from Canadians who are either in their 50 or 60s, are about to retire (or will be retiring in 10 years or less) and are looking learn how to do it properly.

So how do you withdraw from your portfolio properly to pay as little tax as possible? What are some best practices and things to look out for so that you don’t run out of money during your retirement?

Obviously when it comes to retirement planning like this, things gets really complicated, and the risks are ridiculously high since you’re basically at a life stage where you’re going to start spending the money that you’ve been saving and investing throughout your whole life.

So, the stakes are really high. We’re dealing with a lot of real money here, and the terrifying thing is that there are no do-overs.

In other words, if you mess this up, you can’t just hit the rewind button, get all your money back and try again. Because of this, it’s extremely important to get this right as the worse case scenario is basically you running out of money during retirement.

Also if you do run out of money, then going back to the workforce may not be an option due to the physical and/or mental health that you may be in at that time. Employers might also have a preference to hiring someone younger that they can pay less money for, and groom to stay with the company long term (unlike you since you’ll be back in retirement at the first possible opportunity).

Also with all the development in medical technology, now more than ever we are faced with the new challenge of living too long and outliving our money. This makes having a good financial plan that you review with a professional periodically even more important to ensure that you are living the type of lifestyle that you want in retirement, while minimizing the risks of running out of money.

Now I’m not trying to instill fear or anything like that, but I say all this just to help anybody out there realize that this is critically important, doing it wrong can be catastrophic to you and your partner’s life, and so you have to take accountability and responsibility for your financial situation, and not just hope that everything will turn out okay.

So with that said, I’m of the opinion that since the stakes at this stage of life are so high, you need a customized financial plan specific to your particular situations. This is definitely one of those times where you can’t just read a blog post about the top 10 retirement tips and assume that you’re all set, and that some “general” guidance is good enough for you as well.

You simply can’t do this because the stakes are too high (i.e. you running out of money in retirement), and there are too many variables in your life that can change the plan drastically.

For example:

The assets and liabilities you have
The income sources you’ll have in retirement
The dependents you’ll have
Your health
Your goals and ambitions for retirement
Inflation and market returns that you’ve endured in your lifetime
The emergency fund you have
The lifestyle you want in retirement
Family dynamics like marriages, deaths and inheritances
Your risk tolerance
and the list goes on and on.

To address and help you with this, I’d like to introduce you to Sandi Martin who is a professional fee-for-service financial planner here in Canada.

Sandi has been requested by listeners of the show, and in this interview I chat with Sandi about the top questions that I’ve been asked from Build Wealth Canada listeners, especially those in their 50s and 60s that are nearing or at retirement. So enjoy the interview, and thanks for submitting the questions.

Now just to give you a bit of a background, Sandi is an expert in helping Canadians answer questions specific to their situation such as:

Are you on track to retire? Did you miss something in your analysis?

Are you saving enough for retirement?

What’s the best way to take out income from your portfolio to minimize taxes (based on all your assets and income sources)

How much do you need to save so that you can retire comfortably?

When can you retire? Can you fully retire or semi-retire now?

When should you choose to take your CPP and OAS?

What kind of lifestyle can you expect when you retire based on your current savings?

How can you help ensure that you don’t run out of money in your retirement?

Links and Resources

Top Tools and Resources for Financial Independence (for Canadians): Sign up anywhere on www.BuildWealthCanada.ca for a free guide on all the top tools and sites that I’ve personally used to help us achieve financial independence in our early 30s. They’re also what we use now to optimize and manage our finances, and ensure that we’re paying the lowest fees while getting solid returns on our investments.
Kornel's investing course with free sample lessons at www.BuildWealthCanada.ca/invest

Questions Answered:

Listener Question: “I would be interested in strategies for withdrawing accumulated assets from RRSPs and TFSAs. Is there an order of preference to save on taxes?”
What if a Canadian earns income vs doesn’t earn income during their retirement. How does that affect things?
Can you talk about converting an RRSP to a RRIF. What is it? How does it work?
What is “sequence of returns risk” and how can we protect ourselves from it?
What is an RPP?
What is a LIRA?
- Converting to LIF (Life Income Fund): What is it? How does it apply to this?
- What is a Locked-In Retirement Income Fund (LRIF)?
- What is a Prescribed Registered Retirement Income Fund (PRRIF)?
What about holding money in unregistered accounts. Can you define what that means and how does it apply to this?
When it comes to pensions, what are “defined benefit plans” vs “defined contribution plans”. How does this impact everything?
What numbers do you like to use when forecasting returns for stocks and bonds? What are real vs nominal returns?
Some Canadians consider purchasing annuities for their retirement. Can you define what these are and what are your thoughts on it?