Which accounts to withdraw from - Canada

[Dreamer]

I hope to FIRE in the not too distant future, and I'm trying to figure out which accounts I should withdraw funds from for my living expenses.  As an example, suppose I had:

RRSP account - $300,000
TFSA account - $100,000
non-tax sheltered account - $300,000

I was thinking I would withdraw from the RRSP, which would eventually deplete it to 0, at which time I'd have to switch to one of the other accounts, both of which should be significantly larger by that point in time.  Each year I could also withdraw the max TFSA contribution amount from the non-sheltered account and move it into the TFSA account.

Who has knowledge and experience with this in Canada?

[FrugalToque]

I'm very close to the boat you're in.

My thoughts:
Look at the provincial and federal benefits you're going to get.  For example, low-income earners in Ontario will not just get lower income taxes, they get lower property taxes as well (i.e. a rebate for which you will qualify).  However, if you somehow show zero income, you might not get that rebate at all.  You might want to optimize your income, between sheltered and non-sheltered, to hit some sweet spot.

My instinct, honestly, is to take the non-sheltered out first, so that the income in the RRSP and TFSA can continued to grow while sheltered.  Remember, you want to forever on this.  Would you rather your forever-money be protected or non-protected?

a) RRSP -> you have to pay income tax on it as you withdraw, but it will be a low marginal rate
b) TFSA -> you pay no income tax
c) unsheltered -> you pay tax as it grows (dividends) and when you sell it (the capital gains rate, only on the gains)

But, if you keep your income low enough, you'll be extracting from your RRSP without paying any income tax.

Ideally, for myself, I'd want to show enough income to make everything smooth with GST/HST/property tax rebates while maintaining my money in tax shelters as best I can.  Maybe a spreadsheet would be most appropriate to resolve this.  I'll have to work this our for myself in the next year or so.

Toque.

[daverobev]

RRSP needs to be low enough so that it doesn't have a negative impact when you start OAS, CPP... and GIS, if you're going to be getting it.

If you have children, though, you'd want to delay taking out of the RRSP until they are old enough so you don't reduce your child benefit.

I am ignoring my RRSP until the sproglings are 17+, then drawing it rapidly prior to starting OAS. Or actually I'll be doing the calculations a bit closer to the time - I may start a small draw on the RRSP if it gets too big on its own.

If you are going to be low income, be aware that Canadian Eligible Dividends work against you unregistered - because the 'grossed up' amount is used to determine your income. Bonkers, really.

Also, when you get old enough you get a bit more of a personal allowance. Another $5k or so I believe.

[Dreamer]

Thank you FrugalToque.  I am thinking that drawing down the taxable account might be wiser.  I love spreadsheets, so I'll definitely be doing that too.

daverobev - thanks for bringing up several points that I was completely unaware of.  I will delve further into everything you've mentioned.

[TrMama]

I like this spreadsheet for draw down, http://pabroon.blogspot.com/2015/05/retirement-planning-and-forecasting-20.html

[Lews Therin]

I created this for my withdrawal plan: it allows me to withdraw enough to burn through my RRSP (emptying out my least optimal tax burden completely) and then all I have left is capital gains, dividends, and TFSA money.

Depending on how old you are, you could remove all of the RRSP at very low tax rates. In Frugal Toque's scenario you will be paying less tax early, but more later. I'm aiming for less taxes in the long run. With 300k, you've got a few decades of withdrawals to remove before it runs out (I assume that you are at around 4% for 700k)

Run scenarios with the simpletax.ca/calculator to find the sweet spot for taxes.

[Ottawa]

Look at the provincial and federal benefits you're going to get.  For example, low-income earners in Ontario will not just get lower income taxes, they get lower property taxes as well (i.e. a rebate for which you will qualify).  However, if you somehow show zero income, you might not get that rebate at all.  You might want to optimize your income, between sheltered and non-sheltered, to hit some sweet spot.
...
Ideally, for myself, I'd want to show enough income to make everything smooth with GST/HST/property tax rebates while maintaining my money in tax shelters as best I can.  Maybe a spreadsheet would be most appropriate to resolve this.  I'll have to work this our for myself in the next year or so.

Toque.

This is an interesting topic that will vary by your stash-structure.  We have very little in RRSP (Gov Employees) and a large amount in non-reg.  We anticipate withdrawing all dividends to fund retirement, and selling few if any actual share units.  We'll also look at shifting 11K (presently) each year to our TFSAs. 

Since Toque provided the segue: I wonder the best way to optimize eligible amounts and also - are there any credits I'm missing or have incorrectly assumed ?Living in Ontario, I've been looking at what benefits we may be eligible for.  So far, it seems the following apply :

Ontario Sales Tax Credit
Ontario Energy and Property Tax Credit
GST/HST Tax Credit
Canada Child Tax Benefit
Ontario Child Benefit
for above: https://www.canada.ca/en/revenue-agency/services/child-family-benefits/child-family-benefits-calculator.html

Ontario Electricity Supply Program https://ontarioelectricitysupport.ca/


EDIT:  I'm going to move the benefit part to a new post called Canadian Government Benefits -

[Lews Therin]

ahahahah, I googled the Ontario trillium benefit (what FT was talking about for the property and energy rebates) and it's 700$ for me for my 25k income. (That's more than I even have taxes for :D)

[Rightflyer]

PTF

[FI40]

I had no idea Canadian dividend grossed-up values are used for CCB calculation, that's good to know daverobev! It sucks, but it's good to know.

I think I'll come down on the side of withdrawing from nonregistered for the most part as Toque suggests. There is still a lot of time to withdraw from the RRSP, for us, and it's only ~30% of our NW.

Everyone keep in mind you need to keep transferring the max TFSA contribution every year into the TFSA as well. And I can't figure out a scenario where it makes sense to withdraw anything from the TFSA until you absolutely have to - it's the last thing you should touch.

[Lews Therin]

Everyone keep in mind you need to keep transferring the max TFSA contribution every year into the TFSA as well. And I can't figure out a scenario where it makes sense to withdraw anything from the TFSA until you absolutely have to - it's the last thing you should touch.

Because you might want some money at 0% taxes to fill the gap between your current expenses, and the amount you can take out in tax-friendly ways.

You could theorically be at 0% taxation by taking out 10k from RRSP, and 10k from TFSA for a full decade. (Though the reasons to do so would raise people`s eyebrows :D )

[FI40]

Everyone keep in mind you need to keep transferring the max TFSA contribution every year into the TFSA as well. And I can't figure out a scenario where it makes sense to withdraw anything from the TFSA until you absolutely have to - it's the last thing you should touch.

Because you might want some money at 0% taxes to fill the gap between your current expenses, and the amount you can take out in tax-friendly ways.

You could theorically be at 0% taxation by taking out 10k from RRSP, and 10k from TFSA for a full decade. (Though the reasons to do so would raise people`s eyebrows :D )

Hmmmm yeah true. I guess one could cook up scenarios where it would make sense. Like this year you have some big one-time expense, and next year you're expecting a windfall (downsizing house or something I don't know). Then it'd be clear - pay for the expense out of the TFSA, replace it next year, pay no tax.

[daverobev]

Everyone keep in mind you need to keep transferring the max TFSA contribution every year into the TFSA as well. And I can't figure out a scenario where it makes sense to withdraw anything from the TFSA until you absolutely have to - it's the last thing you should touch.

Because you might want some money at 0% taxes to fill the gap between your current expenses, and the amount you can take out in tax-friendly ways.

You could theorically be at 0% taxation by taking out 10k from RRSP, and 10k from TFSA for a full decade. (Though the reasons to do so would raise people`s eyebrows :D )

You have to check that for your projected life, though - paying 20% on a few $k might save you paying 40% on it, or 20% on a lot MORE $k later.

[Lews Therin]

Everyone keep in mind you need to keep transferring the max TFSA contribution every year into the TFSA as well. And I can't figure out a scenario where it makes sense to withdraw anything from the TFSA until you absolutely have to - it's the last thing you should touch.

Because you might want some money at 0% taxes to fill the gap between your current expenses, and the amount you can take out in tax-friendly ways.

You could theorically be at 0% taxation by taking out 10k from RRSP, and 10k from TFSA for a full decade. (Though the reasons to do so would raise people`s eyebrows :D )

You have to check that for your projected life, though - paying 20% on a few $k might save you paying 40% on it, or 20% on a lot MORE $k later.

Not if you don't have income ever! (example, retiring at 30 with 500-600k in the bank) ; 20k expenses.

[FrugalToque]

It certainly gets tricky with the unsheltered account.  As time goes on, if I understand correctly, you're always increasing your tax rate.

(At the beginning, the money you're withdrawing - using tax averaging - consists of mostly the money you've put in.  But as time goes on, more and more of the money in there is capital gains, so your tax rate goes up)

I need a bigger spreadsheet.  And it's going to be complicated by the need to hit the "Trillium" benefit properly, assuming I can find a formula for it.

Toque.

[daverobev]

Everyone keep in mind you need to keep transferring the max TFSA contribution every year into the TFSA as well. And I can't figure out a scenario where it makes sense to withdraw anything from the TFSA until you absolutely have to - it's the last thing you should touch.

Because you might want some money at 0% taxes to fill the gap between your current expenses, and the amount you can take out in tax-friendly ways.

You could theorically be at 0% taxation by taking out 10k from RRSP, and 10k from TFSA for a full decade. (Though the reasons to do so would raise people`s eyebrows :D )

You have to check that for your projected life, though - paying 20% on a few $k might save you paying 40% on it, or 20% on a lot MORE $k later.

Not if you don't have income ever! (example, retiring at 30 with 500-600k in the bank) ; 20k expenses.

You'd have to show me numbers so I can get what you mean. The personal allowance is ~$11k, goes up to about $17k when you hit OAS age. So yeah if you're taking $11k from combined RRSP and unreg... including dividends from unreg, and cap gains.. and even when OAS/CPP kick in you're going to get $17k or less.

[meghan88]

PTF.  Similar situation here, except that we'll be retiring at around age 60.

It seems like continued contributions to the TFSAs are the only common point of agreement in this thread, so that's one good takeaway.

Like the OP, I thought we'd try to deplete the RRSPs as much as possible before having to turn them into RRIFs.  I don't really understand why this isn't a good idea, all things being equal.  I don't want a huge tax hit in 10 years; would rather just draw them down asap and siphon the max into TFSAs as we go. I am not sure I understand what Toque said - does his view make more sense for younger people?

We are also planning on deferring CPP and OAS until age 70.  Both of us are healthy so that seems to make sense (knock on wood).  I've heard different views on this.

In case it matters, our stash should look like this in a couple of years:
- 900K in RRSPs total
- 150K in TFSAs total
- 1.1M in non-registered - no home equity as we plan on selling and then renting

[Prairie Stash]

Non-Sheltered is composed of three parts: initial investment, gains and dividends. You withdraw initial tax free and Canadian dividends (if you are under $45k total income) are tax free in most provinces. The question is hard to answer without dividing the taxable acount into the three parts every year (three potential tax rates being lumped together).

Lest pretend you want to have $28k from your investments (4% of $700k).  Lets also pretend the taxable account is 1/2 gains (the other half is initial investment). Since its Canadian stocks in the investment account, maybe you get 2% dividends, so $6000 in Eligible dividends (this will be tax free); $12000 from the RRSP (tax free) and $10,000 from the sale of stock in the taxable account. Of that $5000 is return of principle, tax free and the rest is gains; of which $2500 is taxed at the full marginal rate. You would pay about $500 in taxes.

You would also want to transfer $5500 into the TFSA every year, pretending $2750 is gains it would be another $550 in taxes.

Altogether thats $12K from RRSP, $6000 in dividends, $16,550 from the taxable account stock sale (slowly draining this account). At any point that you withdraw more than $12k from the RRSP you will pay full tax rate, so delay this as long as possible (defer taxes). Moving money from the taxable account to the TFSA works well as it balloons the TFSA up for the next 20+ years so that you can delay the RRSP taxes until your demise. When the Taxable is drained you switch to pulling from the TFSA without any cares at all.

Summary: pull exactly enough out of the RRSP to fill the basic exemption room every year. The rest is long winded.

[daverobev]

PTF.  Similar situation here, except that we'll be retiring at around age 60.

It seems like continued contributions to the TFSAs are the only common point of agreement in this thread, so that's one good takeaway.

Like the OP, I thought we'd try to deplete the RRSPs as much as possible before having to turn them into RRIFs.  I don't really understand why this isn't a good idea, all things being equal.  I don't want a huge tax hit in 10 years; would rather just draw them down asap and siphon the max into TFSAs as we go. I am not sure I understand what Toque said - does his view make more sense for younger people?

We are also planning on deferring CPP and OAS until age 70.  Both of us are healthy so that seems to make sense (knock on wood).  I've heard different views on this.

In case it matters, our stash should look like this in a couple of years:
- 900K in RRSPs total
- 150K in TFSAs total
- 1.1M in non-registered - no home equity as we plan on selling and then renting

I think he means: Start with $1mm unreg, let's just pretend you reset your cap gains so that it is 100% contributions and zero growth. It grows by 7% a year, and you withdraw 4%.

When you sell your initial $40k worth, you pay no tax because there is no cap gain.

Second year, you have $1,030,000. You take $40k and it grows by 7% again. SOME of that $40k is cap gain, because of the growth that has happened.

After 20 years your port might be worth $2mm. When you sell $40k (inflation adjusted probably $60k), more than half of that is cap gains because of all the selling you've done. You've sold part of your original contributions over the 20 years.

[Lews Therin]

You'd have to show me numbers so I can get what you mean. The personal allowance is ~$11k, goes up to about $17k when you hit OAS age. So yeah if you're taking $11k from combined RRSP and unreg... including dividends from unreg, and cap gains.. and even when OAS/CPP kick in you're going to get $17k or less.

Simple example: 10k RRSP ; 10k dividends: 716$ taxes (3% average)
5k RRSP, 10k dividends, 5k Cap gains 235$ (1.19%)
Easy enough to get the 716 rebated through all the different credits.

Note, I have 35 years to withdraw less than 100k in RRSP. :D

Prairie Stashes`s logic is exactly what I will be doing, but slightly lower than 12k, because I have very low expenses, so I don't need all that from RRSP, but at that level we are talking about dozens of dollars. Not much to be bothered about with the difference of 1-2k in withdrawal.

For FT and the increasing Cap Gains, for taxable after invesment, an option is you'd want to target more dividends for the tax favorableness, and the fact that it will see less gains than one that doesn't pay dividends. That can help lessen the problem. Every year I keep feeding the TFSA new contributions, but I might still pull out some money in order to keep enough money without touching too much tax unfavorable accounts.

(**Probably should've mentionned I have 150k+ in a LIRA, so I'm in a situation where the accounts don't actually self-sustain until I hit 50s, since I can`t draw down that pot of money) So I plan on emptying my taxable and RRSP to totality, before touching my LIRA money, all at the lowest tax bracket.

[bluebelle]

The following applies to folks who have larger RRSP amounts:
one thing to remember and keep in mind, is the minimum withdrawal rates that take effect when you convert your RRSP to a RRIF.  At age 71, that withdrawal rate is 5.28%, and it's up to 6.82% by the time you're 80 and 11.82% by the time you're 90.....if you leave your RRSP to grow too large, you end up forced to take large withdrawals later.   All withdrawals from a RRIF (or RRSP) are taxed the same as income (highest tax rate).   Also, when one spouse passes, and that RRIF money rolls tax free to the remaining spouse, that's a much bigger pile of dollars you will be forced to withdraw.  (sounds morbid, but I expect to be a widow for 20-30 years in retirement - unless he really starts taking better care of himself)

I'm retiring later than many of you (56-57), but my plan is to withdraw some amount from my RRSP between the ages of 57-64, convert a small amount of RRSP to a RRIF at age 65 and withdraw from it onwards (at age 65, RRIF withdrawals count as a 'pension' to get the pension credit on your taxes).  I haven't figured out the sweet spot of how much to pull from what. 

Like the others have said, my TFSA $ will be the last money touched.....although I'm thinking it might get used for big ticket purchases like a car replacement.  Still mulling that over.

[Lews Therin]

Now that we've cleared up the generalities, @Dreamer : What age are you?

That will be the most significant decider for which account to draw from and in which proportions!

[daverobev]

The following applies to folks who have larger RRSP amounts:
one thing to remember and keep in mind, is the minimum withdrawal rates that take effect when you convert your RRSP to a RRIF.  At age 71, that withdrawal rate is 5.28%, and it's up to 6.82% by the time you're 80 and 11.82% by the time you're 90.....if you leave your RRSP to grow too large, you end up forced to take large withdrawals later.   All withdrawals from a RRIF (or RRSP) are taxed the same as income (highest tax rate).   Also, when one spouse passes, and that RRIF money rolls tax free to the remaining spouse, that's a much bigger pile of dollars you will be forced to withdraw.  (sounds morbid, but I expect to be a widow for 20-30 years in retirement - unless he really starts taking better care of himself)

I'm retiring later than many of you (56-57), but my plan is to withdraw some amount from my RRSP between the ages of 57-64, convert a small amount of RRSP to a RRIF at age 65 and withdraw from it onwards (at age 65, RRIF withdrawals count as a 'pension' to get the pension credit on your taxes).  I haven't figured out the sweet spot of how much to pull from what. 

Like the others have said, my TFSA $ will be the last money touched.....although I'm thinking it might get used for big ticket purchases like a car replacement.  Still mulling that over.

Wow.

I'd love it if there was a really good income calculator... that told you when to take what from where. Based on asset al/locations.

When you hit 65 you get

more personal allowance - an "age amount" in addition to the "personal amount", line 301

OAS

CPP

GIS

Cheap everything at SDM/Rexall

Pension credit

Cheaper drugs?

https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2016/seniors-enjoy-your-golden-years-these-tax-credits-benefits.html

Man. Makes me think... it'll be damn hard to optimise, but actually I feel better about pumping money into my RRSP the last couple of years.

I should basically pay no more tax here. The question becomes how much money the government is going to give me - which is crazy. Crazy. I think I'm going to be eligible for GIS (which, honestly, would be enough for me to live on - OAS+GIS combined), though I don't feel like I should be.

Still! I have ~30 years til getting to that point, and a LOT can change.

Does make me reconsider if I should buy extra years of UK state pension. And, of course, there is a chance I won't be in Canada when I retire anyway... Eh I mean, when I reach 65. I'm "retired" now.

[thriftyc]

(**Probably should've mentionned I have 150k+ in a LIRA, so I'm in a situation where the accounts don't actually self-sustain until I hit 50s, since I can`t draw down that pot of money) So I plan on emptying my taxable and RRSP to totality, before touching my LIRA money, all at the lowest tax bracket.

I have a LIRA as well, about 320K currently and was going to try to drawdown that first when I retire next year at 45. 
Using the financial hardship rule:
https://www.fsco.gov.on.ca/en/pensions/financial_hardship/Pages/financial_hardship_2012_budget.aspx

Has anyone else looked into this?  I believe each province has its own set of withdrawal rules for LIRA's.

[Dreamer]

Now that we've cleared up the generalities, @Dreamer : What age are you?

That will be the most significant decider for which account to draw from and in which proportions!

Missed this question back in April.  I expect to be ~50 when I retire.

[Lews Therin]

(**Probably should've mentionned I have 150k+ in a LIRA, so I'm in a situation where the accounts don't actually self-sustain until I hit 50s, since I can`t draw down that pot of money) So I plan on emptying my taxable and RRSP to totality, before touching my LIRA money, all at the lowest tax bracket.

I have a LIRA as well, about 320K currently and was going to try to drawdown that first when I retire next year at 45. 
Using the financial hardship rule:
https://www.fsco.gov.on.ca/en/pensions/financial_hardship/Pages/financial_hardship_2012_budget.aspx

Has anyone else looked into this?  I believe each province has its own set of withdrawal rules for LIRA's.

Read the Pension Puzzle by Bruce Cohen. The last third of the book goes through every example of different types of Pension. You just have to ask yours which program they are in. (federal, provincial, private)