How to Tap into Your Retirement Accounts
Once you retire, your income will come from several sources. You’ll have income from government benefits (CPP and OAS) and maybe a workplace pension. Then, you’ll most likely have to top up your income from investment accounts – RRSPs, LIRAs, TFSAs, and non-registered savings.
You need to decide which of these accounts to tap into first.
The traditional retirement income strategy was to apply for CPP at age 60 and withdraw from your taxable accounts first. This would allow your tax-free and tax-deferred accounts to keep growing. That means putting off converting your RRSP to a RRIF until age 71 and beginning withdrawals in the year you turn 72.
Indeed, the natural inclination is to put off paying taxes for as long as possible.
When will you need the income?
It’s all very well to suggest deferring taxes for as long as possible by holding off on RRIF withdrawals until age 72. Plus, the current advice to delay your CPP and OAS applications until you are 70 to increase the payments is not for everyone.
What if you retire long before then? What if you don’t have the luxury of waiting because, well, you need the money now. It has to come from somewhere, especially if you don’t have a workplace pension.
Where will the money come from?
Think of your retirement income options
When and in what order you start withdrawing your retirement income will make a difference to your bottom line.
It’s beneficial to have a fairly smooth income and tax rate over retirement instead of having low income in the early years – and be in a low tax bracket – and then high income in later years with the potential for OAS clawbacks.
So, what’s the best order to access your money that will make it last the longest and incur the lowest income tax bill while giving you enough to live on throughout retirement? There are hundreds of combinations. It’s no wonder we have difficulty choosing the best option for us.
If you have a Defined Benefit pension there are rules for how early you can start drawing from it, with or without penalty. CPP/QPP payments can’t start before age 60 and OAS before age 65.
Most people tend to apply for CPP and OAS as early as possible. Perhaps they feel it won’t be there for them later on. Or, they have the idea they can invest it and earn even more money.
But sometimes it makes more sense to delay government and DB pensions because the earlier you begin, the smaller each payment will be.
Depending on your age, generally, this sequence of withdrawals from your investments is a good starting point for your additional income requirements:
- Take a portion of your RRSP/RRIF or defined-contribution pension payments especially if you have large balances in these accounts. At age 65 you can claim the pension tax credit
- Supplement your income with non-registered funds. Only dividends, interest and capital gains are classified as taxable income.
- Try to leave your TFSA as long as possible if you can or use it to top up to your next marginal tax bracket.
Some payment sources are fixed, and others are more flexible allowing you to withdraw more or less as needed.
Everyone’s situation is unique, and it’s always recommended you get personalized advice before making your decision.
The bottom line
Back in the day, when someone retired, he or she would replace their employment income with pension payments and government benefits. Some personal savings covered extra expenses such as travel or a new vehicle.
Now there are multiple sources of retirement income, many with their own tax consequences.
I gave my retirement withdrawal strategy a lot of thought and did many calculations.
Neither of us is fortunate enough to receive a company pension. My husband was on CPP disability payments which automatically switched to regular CPP payments when he turned 65 plus he receives OAS.
I will apply for CPP when I’m 66½ and I’m considering waiting until 70 for OAS.
We converted our RRSPs to RRIFs and take out the minimum payment. Our investments are largely dividend-paying stocks and so far, the paid out dividends cover our withdrawals.
The remainder comes from our non-registered investments.
Our TFSAs are a flexible wild card and I haven’t had to draw from them as yet. Those funds may be used for future big-ticket items.
Don’t leave your income payments to chance. It’s definitely worthwhile to do some income calculations, either on your own or with your financial advisor.