Q – My husband and I are both 45 and set to retire in 15 years. We have the majority of our money invested in mutual funds divided between RRSPs and cash accounts. We are looking to do some planning and wonder where we should be withdrawing money from first in retirement? – Tammy S., Toronto, Ontario
A – Traditionally, financial planners believe you should withdraw from your non-registered funds first and then deplete your RRSPs. In some cases this is the right advice. However, in the year you turn 71, you will need to convert your RRSP into a Registered Retirement Income Fund (RRIF) or an annuity, and you must begin to withdraw based on a formula set by the government.
If you and your husband both receive defined benefit company pensions and will collect the maximum Canada Pension Plan, for example, you will want to think about taking a more balanced approach to withdrawing money from both types of accounts to keep your income steady and as low as possible over your lifetime to ensure you pay the least possible amount of tax and avoid having Old Age Security payments clawed back.
If you were start withdrawing monies from your RRIF at 71 and your RRSPs were worth $500,000 each, earning 5% return indexed at 2.5%, you would each need to withdraw about $36,900 annually. If you each have annual pension income of $45,000 and CPP of $11,520, you would have a family income of about $186, 840.
In this case you would pay more tax and more of your OAS would be clawed back than if you withdrew from both types of accounts. If you started to take your registred payments at 60, you would only take $16,666 each into income each year from your registered funds and would pay less tax and less OAS clawback.
The decision on when to withdraw income and from which retirement accounts is an important one, and as you can see, many details need to be considered, depending on your personal situation. There is no single “forumula” or right answer. If in doubt, consult a qualified financial planner. – R.T.