Tips for drawing down funds in retirement

If your client is nearing retirement, they may be wondering how to withdraw their money in the most tax-efficient manner. 

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“Clients are often confused about the various pools of funds that they have,” said Susan Wood, director of wealth strategies at CIBC Private Wealth.

Wood recommends looking at after-tax cash flow from various sources of income. This could include employment income if the client is still working, government income such as Canada Pension Plan (CPP) or old age security (OAS), or workplace pension income.

Depending on the client’s age, they could also receive payments from their RRIF or RRSP as well as any investment or rental income. 

Next, a client will need to analyze their lifestyle expenses in any given year. If total lifestyle expenses are greater than after-tax cash flow, clients will want to withdraw funds from assets that are relatively tax-efficient, Wood said. 

“It’s best to first redeem from assets that attract the least amount of tax,” she said. 

Clients can look to their TFSA for tax-free withdrawals or at non-registered investments that have lower gains and less tax payable.

However, Wood said clients who can afford to would benefit from leaving their TFSAs alone to benefit from tax-free compounding.

“As tempting as it may be to use this account for tax-free funds, leaving these assets growing on a tax-deferred basis compounded over your lifetime will likely maximize the after-tax value of your estate — and, perhaps more importantly, the after-tax amount that can flow to your beneficiary,” she said.

If a client has a private corporation, they can utilize its taxable dividends, especially because the latter are generally taxed at a preferred rate, Wood said.  

If clients need additional funds, they may look at less tax-efficient sources, such as lump-sum withdrawals from RRSPs or RRIFs above the mandatory minimum, which are fully taxable. 

Wealthier clients with other funds to sustain their lifestyle should defer drawing from RRSPs as long as possible “so they benefit from the compound tax-deferred growth in the registered plan,” Wood said.

A possible exception to this rule of thumb applies to certain clients at age 65.

“If you have no other pension income that is eligible for the $2,000 pension tax credit, you could consider converting a portion of your RRSPs to a RRIF to generate enough pension income to allow you to claim the full $2,000 pension tax credit annually,” she said.

This represents an annual tax savings of about $300, Wood said, which adds up to $2,100 over the seven-year period between age 65 and age 72, or $4,200 for a couple.

Lastly, if a client has investments in a personal corporation that can’t be withdrawn tax-free, Wood recommends drawing down on any personal non-registered assets first and leaving funds not required to sustain their lifestyle in the corporation to take advantage of the tax deferral. This is particularly true for funds generated from an operating business and subject to low tax rates at the time they were earned, she said.

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