A common question I’m generally asked is how to draw down your portfolio in retirement. For years we work, save, invest, and build up a nest egg. Then, in retirement, we need to start drawing down our investments. Which do you draw down first? Your RRSP? Your TFSA? What about non-registered investments? Each account has different tax consequences. So, a withdrawal plan can help you minimize the taxes. The starting point of any withdrawal strategy is your needs. How much income do you need every month in retirement? Once the budget is sorted, we can determine the order in which to draw down your investment accounts.
Every situation is unique and requires an individualized plan. However, we frequently suggest folks start by drawing down their registered accounts. RRSPs, RRIFs, LIRAs, LIFs, PRIFs, most of the alphabet soup of the financial world relate to registered accounts. When you withdraw money from a registered account, it is usually treated as income, which means it is FULLY taxable. As well, when you pass away, most of these accounts can pass tax-free to your spouse. However, upon their passing, any balance in these accounts is treated as income and is thus fully taxed. For example, if you and your spouse pass away and there is still $300,000 in the RRSP, all of it is treated as income on your final tax return. This means you will have to claim 300,000 of income, pushing you into the highest tax bracket. I say it jokingly, but there is a grain of truth in this, I often tell folks: “Don’t die with lots of money in your RRSP!” RRSPs, LIRAs, LIFs – withdrawals from these registered accounts are usually the most heavily taxed and can create a tax liability for your estate, so we typically suggest you draw them down first. The second account to focus on for withdrawals are non-registered investments. After you top your TFSA and your RRSP, the additional funds are often invested in a non-registered account. Think of these accounts almost like a pay-as-you-go system. Every year you will have to claim some of the gains in the portfolio on your tax return, which means you withdraw from these accounts, and some of the tax has already been paid. As well, you can access capital gains and dividends in non-registered accounts, which are generally more tax-efficient than sources of income. All these factors mean withdrawals from non-registered accounts are usually not as heavily taxed as withdrawals from RRSPs or registered accounts. The last account we typically withdraw from the TFSA. The Tax-Free Savings Account is technically a registered account; however, it differs from all those mentioned above because withdrawals are completely tax-free. Additionally, unlike the RRSP, the TFSA is not a tax liability for your estate. Any funds remaining in the TFSA when you pass away simply transfer to the beneficiary tax-free. We typically suggest folks chip away at the accounts with larger tax consequences first and leave the TFSAs for last. So, we know how much we need in retirement, we have the order of the withdrawals, and the last piece of the puzzle is using the tax brackets to guide our withdrawals. For example, if you have withdrawn the amount you need, taking from the registered accounts first, and your total income for the year is $47,000, it might make sense to draw a little extra from your RRSP, or other registered accounts, to top up your bracket. The additional withdrawal helps you meltdown your RRSP faster, but since you are in the same tax bracket, your marginal income tax rate has not changed. The above is a general guide on how to draw down your portfolio in retirement. Contact your financial professionals to ensure you have a detailed withdrawal plan that helps minimize tax and meets your unique retirement needs. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning Is it possible to bet the benefits of both an RRSP and a TFSA in one account? According to draft legislation, such an account could launch in Canada in 2023. The proposed account is the Tax-Free First Home Savings Account (RHSA). Currently, the RHSA is part of draft legislation, it is not approved as of yet, if it is approved, some of the details could change. It is expected to launch in 2023, the information we have at the moment indicates the FHSA is intended for residents of Canada, who are at least 18 years of age and are first-time homebuyers. In order to qualify as a first-time homebuyer, you cannot own a principal resident at any time during the calendar year you open the FHSA, or at any time in the four preceding calendar years.
So, this proposed account is intended to help first-time home buyers save for a brand-new home. The FHSA combines the features of an RRSP and a TFSA. If you qualify to open an RHSA, there is a lifetime contribution limit of $40,000. The per-year contribution limit is $8,000. If you don’t use that full amount in one year, the contribution limit rolls over. Similar to an RRSP, the money you contribute to an RHSA is tax deductible. You get a full tax deduction for every dollar you add to the account. Once in the FHSA, the money grows tax-free and can be withdrawn from the account without any tax consequence, similar to a TFSA. Your TFSA contribution room and RRSP contribution room are separate from the FHSA, so contributions to the FHSA will not impact your contribution room for the RRSP and TFSA. Investments permitted inside the RHSA are the same as those for TFSA and RRSP. The account is intended for first-time homebuyers, so once a withdrawal is made, you must buy or build a home by October of the following calendar year. So, if you withdraw funds from the FHSA in February of 2023, you have until October 2024 to get your home. You cannot use the funds in the FHSA for a rental property or cottage, the funds in the FHSA must be used for your principal residence. The account can remain open for 15 years. However, it must be closed by the end of the calendar year following the withdrawal. As well, any unused funds can be rolled into your RRSP without impacting your RRSP room. For example, let’s say you had $40,000 in your FHSA and in February of 2023 you withdraw $30,000 to put toward a home. That means you would have until October 2024 to get the home and the FHSA would have to be closed by the end of December 2024. Also, the unused funds, $10,000 in our example, could roll over to your RRSP. The rollover does not impact your RRSP room, if you had $5,000 of RRSP room, you could roll the $10,000 remaining in the FHSA into your RRSP, all of it would go to your RRSP and you would still have $5,000 of RRSP room. If you withdraw from the FHSA but don’t use the money towards a home, the withdrawal will be taxed. The withdrawal is only tax-free if it's used for its intended purpose – which is purchasing your first home. As well, at the end of the 15 years or after you purchase your home, if you don’t roll the remaining funds in the FHSA to your RRSP, it’s taxed. The Tax-Free First Home Savings Account is draft legislation. It is expected to launch in 2023 and could be a powerful tool to help Canadians save for a home. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning |
AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
July 2023
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