During ones’ lifetime, Canadians endeavor to accumulate enough assets to comfortably retire through various structures such as RRSPs, TFSAs, locked-in registered accounts, non-registered and corporate accounts. However, when retirement approaches, some may be uncertain which assets to withdraw from first. It is important to determine a withdrawal plan that optimizes your after-tax retirement income. Determining where to withdraw funds can depend on factors like the asset type and the allocation mix of each account. Further considerations include, the withdraw flexibility of each account and any ensuing tax consequences. With these lenses, we review different account types below.

Locked-in account (LIF,LRIF,PRIF) and RRIF - Minimums

As investors reach age 71, minimum withdrawal payments are mandatory. These payments are taxed as regular income. The purpose of a minimum payment is to smooth out your income throughout your retirement. Prior to 71, you can keep the funds in RRSPs or LIRA to avoid receiving minimum payments and the resultant tax bill.

Taxable non-registered distributions

This is taxable when the income is earned, not distributed or withdrawn. Keep in mind that dividend income is taxed more favourably compared to interest income. This is a good source of income to draw from as you have already paid taxes on it. By using the distributions, you are preventing the distribution from being reinvested which could further compound and generate future taxable earnings.

TFSA

Withdrawals from TFSAs are tax free, which makes it convenient during periods where you do not want to increase your taxable income by drawing RSPs or realizing capital gains from a non-registered account. The downside is that withdrawing money from this account decreases your ability for tax-free growth if the withdrawals are not replenished.

Locked-in account and RRIF – Above the Minimum

For individuals that are in a lower tax bracket today but expect to be in a higher bracket in the future, it could make sense to withdraw more than the required minimum. On the flip side, larger withdrawals reduce the power of tax-deferred growth.

Capital gains from non-registered account

Capital gains offer the most favourable tax treatment as only a portion of the gains are included in the tax calculation. At the time of this writing, the capital gains inclusion rate is 50%. The latest budget has proposed a 66% inclusion rate for corporations. For individuals, any incremental gain above $250,000 would also be subject to the higher inclusion rate.

The above guidelines are for the personal side but individuals with a corporate account should consider the following as well:

Capital dividends from your private corporation: Balances from the capital dividend account (CDA) can be paid out to shareholders tax free and is an effective source of retirement income.

Repayment of shareholder loans owed to you from your private corporation: Similar to the CDA, the repayment of a loan does not trigger any personal tax and a good way to draw down funds from the corporation.

Dividend payments from your private corporation: This is a taxable event, but dividend rates can be lower than regular income.

Keep in mind these guidelines and everyone’s personal circumstance may cause differing tax results. For example, an individual that is focused on transferring as much wealth as possible to their next generation may decide to draw down capital from their non-registered account before they touch their TFSA. The rationale is that the TFSA grows tax free and is passed onto beneficiary tax free, whereas the non-registered account does not grow tax free and at the date of death, a deemed disposition occurs that can generate a large capital gain tax bill.

It is imperative to speak to a qualified tax advisor to draft an optimized withdrawal solution for you and your family throughout retirement.