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Insights & advice

Tax-efficient retirement withdrawal strategies

May 2022 – 15 min read

Key takeaways

  • There are ways you can manage the amount of income tax you pay in retirement

  • Withdrawing from various types of retirement accounts in the right order can make a difference

  • Pension income splitting can help you pay less tax

  • TFSAs are a tax-efficient place to keep money in retirement

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How do you pay less tax on retirement income?

You’ve worked hard to save for your retirement. The last thing you want to do is pay more tax than necessary as you turn those savings into retirement income. 

Minimizing the income tax you pay is one way to help your savings go further. Here are a couple of strategies to consider to help manage your annual tax payable in retirement.

Maximize your tax bracket

It’s important to understand the tax bracket you’ll likely fall into based on the income you get from all sources, including old age security (OAS), Canada/Quebec pension plan (CPP/QPP), annuities, employment, registered pension plan (RPP) and registered retirement income fund (RRIF) minimum payment amounts.

Tax bracket
Taxable income
Illustration of combined federal and provincial tax
First $50,197
$50,197 up to $100,392
$100,392 up to $155,625
4 $155,625 up to $221,708 39%
5 Over $221,708 43%

The above example is for illustrative purposes only, and does not reflect actual tax rates. Situations will vary according to your province/territory and specific circumstances.

If you need more cash flow and you’re close to the top of a tax bracket, use sources where the withdrawals aren’t taxed like a tax-free savings account (TFSA) to avoid moving up to a higher bracket and paying taxes at a higher rate. You may also consider accessing non-registered assets. Note: selling some non-registered investments may generate a capital gain or loss you’ll need to report on your tax return. 

However, if you’re in the middle or lower end of a tax bracket and need more money, consider taking it from taxable sources such as RRIFs and life income funds (LIFs). 

Generally, especially in lower tax brackets, if you’re going to pay tax at a particular rate, you may as well max out that tax bracket and pay tax at that rate each year. The alternative is possibly sliding into a higher tax bracket some years and potentially paying more tax.

However, watch out for a potential clawback of government benefits if your retirement income is above a certain amount. 

If you don’t need to use all the income you take in the “max-out” years, you can provide yourself with more flexibility later by putting the extra money into your TFSA or non-registered assets. This way, in the future, you’ll be able to withdraw money from those accounts without paying tax and potentially reduce future net income.

Pension income splitting

This strategy helps reduce taxes by transferring pension income (for tax purposes) from the higher income earner to the lower income earner. The transferring spouse or common-law partner can give up to 50% of their eligible pension income to the receiving spouse or common-law partner. 

If you, as the transferring spouse, are age 65 or older, eligible pension income splitting sources include:

  • RRIF
  • RPP
  • Annuity purchased with a registered retirement savings plan (RRSP)

If you’re under age 65, eligible income is mainly limited to:

  • RPP benefits
  • Certain payments resulting from the death of a spouse or common-law partner

Note: Quebec residents under age 65 can’t split pension income for provincial income taxes.

TFSAs during retirement

Because any money earned inside a TFSA isn’t taxable, even when you withdraw it, you may be better to hold retirement assets in a TFSA (up to the contribution limits) rather than a non-registered account. 

TFSAs are great place to “park” money in retirement including RRIF money you’ve been required to withdraw but don’t have a use for, or emergency fund for unexpected expenses. 

You can also give your spouse money to deposit in their TFSA, which is a way to split income for TFSA contribution amounts.

How do you withdraw income from various retirement accounts?

  • RRSP – Any time before Dec. 31 of the year you turn 71, you have 2 options. The first is to convert your RRSP to a RRIF. With this option, there is a minimum amount you must withdraw each year based on the Income Tax Act (Canada). 

    You can choose how much you take out over the minimum amount and when you get it. However, a withdrawal of up to $5,000 is subject to 10% withholding tax, $5,000 to $15,000 is subject to 20%, and over $15,000 is subject to 30% withholding tax. In Quebec, the applicable rates are 5%, 10% and 15% federal tax, with 16% provincial tax withheld regardless of the amount. The other option is to purchase an income annuity. You’ll receive guaranteed payments for a specific period or for the rest of your life.

  • Non-registered accounts – Take out as much as you want whenever you want. But remember, selling some non-registered investments may generate a capital gain or loss you’ll need to report on your tax return.

  • LIF – Similar to a RRIF, there is a minimum payment amount that must be paid to you each year based on federal government limits. There is also a maximum amount that you may choose to receive each year based on the applicable pension legislation.

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The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of the date of publication. Future changes to tax legislation and interpretations may affect this information. This information is general in nature, and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate legal, accounting or tax advisor.