For retirees, sometimes it can make sense to pay a little more tax today to pay less tax in the long run.

It's often recommended that retirees draw income from low or non-taxable income sources first, such as Tax-Free Savings Accounts (TFSAs), and minimize withdrawals from income sources taxed at their marginal rate, such as Registered Retirement Income Funds (RRIFs). 

While this is often good advice, no definitive withdrawal sequence applies to everyone. As a retiree, you need to consider your situation, your tax rates at various times and your upcoming financial needs.

You may have a retirement income gap

Many people retire before their employment pension or government pension kicking in. In these "gap years" your income may be lower than it will be in the future. In this instance, it may be worthwhile to draw retirement income from your RRSP, rather than your TFSA or via the sale of securities. 

By making a RRSP withdrawal during a gap year, rather than from low or non-taxable sources, you may be unnecessarily triggering taxes. However, if your tax rate today is lower than it will be after you begin receiving your pension, you could generate more after-tax dollars. Further down the road, after you convert your RRSP to a RRIF because you made RRSP withdrawals earlier, all else equal, your RRIF assets will be lower and therefore your mandatory RRIF withdrawals will also be lower, which can further lower your tax bill. 

You may have inconsistent retirement income

Not everyone's retirement income will be as smooth as a guaranteed pension. Taking on occasional work, or starting another career in retirement can result in relatively volatile year-over-year income. While planning ahead is not always easy, if a contract is coming up "next year" or a lump sum payment for a job will soon be paid out, consider smoothing your year-over-year income by coordinating uneven employment income with investment withdrawals. 

Smoothing your income can help avoid one-off years with high-income generation and higher taxes. While it may mean pulling income forward and paying more tax today, in the long run, it can lower your overall taxes. 

Your income needs may vary from year-to-year

Drawing income from your investments is often driven by your needs (or wants), rather than solely providing steady income to cover the bills. You may be planning to buy a cottage, take a long vacation or complete a big home renovation. You might also be looking to help out your children or make a significant charitable donation. In these instances, withdrawing the funds over multiple years, rather than in one lump sum, could help lower your taxes. 

Summary

It may seem counter-intuitive to unnecessarily trigger taxes today by pulling income forward through the sale of an investment, an early RRSP withdrawal, or withdrawing more than the minimum form your RRIF, but for many people, the payoff could be significant.

Planning ahead is not always easy, but it's the key to navigating retirement if income generation and income needs could change significantly from year-to-year. Essentially, the basic goal is to look at smoothing your income, and whether paying a little more tax today can help avoid unnecessary high future tax bills. 

If you are interested in learning more or would like a complimentary review of your situation, contact us by email or by phone at 905-895-4102.

Connor Ryan, MBA

connor.ryan@rbc.com

905-895-4102