You undoubtedly accumulate retirement savings in various forms. In fact, RRSPs, TFSAs, LIRAs and other types of accounts all have their own special features, both when investing in these vehicles and when withdrawing income from them. So if you're near retirement, it's not always easy to know in which order to proceed.
A poor withdrawal strategy can have a major tax impact and reduce your available savings. That's why you should know which scenario fits your situation best before you retire. This way, you can make your savings last longer and pay less tax on them.
Some general rules
There are general recommendations to follow when establishing a withdrawal strategy. First, here are some rules you might find helpful.
1. Establish your strategy in advance
If possible, prepare your withdrawal plan a few years before you retire. At the same time, you can assess whether you have accumulated enough savings to meet your needs, and make adjustments if necessary. Preparing your strategy will also enable you to secure the necessary funds prior to withdrawal.
It is generally recommended to make withdrawals in the following order: non-registered accounts, TFSAs, then registered accounts (RRSPs and LIRAs). This will enable you to take greater advantage of the tax deferral provided by registered investment vehicles. However, each situation is different, and the accounts to prioritize may differ from one person to the next. In some cases, it may even be appropriate to withdraw funds from more than one account at a time.
2. Secure the necessary funds in more conservative investments
It may be beneficial to transfer the funds to be withdrawn into low-risk investments one or two years in advance. Since the rest of your portfolio remains invested according to your investor profile, it can continue to grow.
3. Determine the best time to receive your government pensions
The longer your life expectancy, the more advantageous it is to defer your Québec Pension Plan (QPP) benefits. Unless you have a major health problem or a family history that shortens your life expectancy, you could wait until age 70 to receive your QPP benefits. In fact, if you wait until after your 65th birthday to apply for your pension, it will be increased by 8.4% for each year of deferral up to age 70. This represents an increase of 42% over five years.
As far as the Old Age Security pension is concerned, you will find relevant information in our October 2013 column We no longer have the pensions we once had! Since then, however, the maximum pension amounts have increased slightly. You can view them here.
Depending on your situation, there are several different strategies you can use. They vary according to your age, the type of accounts you hold, the capital you've accumulated, and other factors. The following details can help you make informed choices.
When you plan to make withdrawals from your non-registered accounts, pay particular attention to the tax impact of capital gains or losses on funds you redeem. By comparing the book value to the market value of the funds, you can determine whether there is a capital gain or loss and see which of these scenarios is favourable for you. However, be careful not to unbalance the asset allocation of your portfolio.
If, at age 65, you plan to start making withdrawals from your RRSP without receiving a retirement pension, it's a good idea to first convert the RRSP into a RRIF. When you do so, you are able to claim the pension income amount.
Note that if you're planning withdrawals from an RRSP knowing that your income will increase over the years, you can, a few years before using these funds, withdraw them and transfer them to a TFSA to maximize your contributions. By doing so, you'll reduce future RRSP income which, unlike TFSA income, are taxable. This will increase your chances of benefiting from certain government programs, such as the Old Age Security pension.
If you hold substantial sums in a LIRA, you should be aware of the following. To use the money accumulated in this type of account, you must transfer it to a life income fund (LIF) or a life annuity. However, a LIF has minimum and maximum annual withdrawal limits. If you believe that the maximum LIF withdrawal will be insufficient to meet your needs, you can plan your withdrawals so as to unlock funds in your LIRA and transfer them to an RRSP several years in advance. This way, you'll be able to use these funds as you please in the future.
Good news if you are a couple: you can use your spouse's age to reduce the mandatory annual withdrawals from your RRIF. Since these withdrawals increase with age, you can benefit from this measure if your spouse is younger than you. However, this choice is made when you open an RRIF account and cannot be changed afterwards, unless you open a new RRIF.
Does your income from your RRSP, LIRA and other investments exceed your financial needs? If so, you can reinvest the surplus funds in a TFSA, if you have not used up all your contribution room, or in a non-registered account and hope for an additional return. Since the TFSA contribution limit for 2015 was increased to $10,000, this may be an attractive option.
Finally, pension income splitting is an important element to consider for your withdrawal strategy, as it may provide important tax savings.
Are withdrawal plans complex? You said it! Don't hesitate to consult our Advisory Service team, by calling 514-788-6485 (toll free 1-800-291-0337), Monday to Friday, from 8 a.m. to 8 p.m. (Eastern time).
You can also email the team at [email protected]; you'll receive an answer within 24 to 48 business hours.