Paying too much tax in retirement is one of the most common and costly mistakes we see. If you’ve saved well but aren’t sure how to draw down your accounts, you could end up paying tens or even hundreds of thousands of dollars more in taxes than necessary.
Let’s walk through a real example to show how much of a difference the right strategy can make.
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Jim’s retirement situation
Jim was 60 and recently retired. He had two children, one grandchild on the way, and a goal of leaving a strong legacy for his family. He had done a great job saving:
- $900,000 in RRSPs
- $300,000 in a non-registered account
- $100,000 in a TFSA
- Owns his home, worth $750,000
He planned to spend $5,400 per month in retirement. With CPP starting at age 60 and OAS planned for age 65, his overall plan was over 100 percent funded. But like many retirees, he wasn’t sure how to actually withdraw the money.
Strategy 1: Defer RRSP withdrawals
Jim had heard it was smart to defer taxes, so his first instinct was to use his TFSA and non-registered accounts first, and leave the RRSP untouched until later.
That strategy worked for a while, but by the time Jim reached age 84, his RRIF (formerly his RRSP) still held nearly $580,000. Since he didn’t have a spouse, that entire amount became taxable in the year of death.
His final tax bill included $297,000 in income tax and $26,000 in estate tax. After everything was paid, his family would receive a net estate of $1.47 million.
Strategy 2: Level out taxable income
Instead of deferring tax, we tested a more balanced withdrawal plan that aimed to keep Jim’s taxable income around $69,000 per year. This meant drawing from his RRSP earlier while letting the TFSA grow untouched.
By age 84, Jim still had the same house, now worth $1.2 million. But his registered accounts were mostly drawn down, leaving only $47,000 in his RRIF. His TFSA had grown to over $340,000, and he still had money left in his non-registered account.
Because less of his estate was tied up in heavily taxed accounts, his final tax bill was much lower. His family would receive $1.6 million — an increase of over $150,000 compared to the first strategy.
Final thoughts
Many retirees focus on minimizing taxes today, but the real goal is minimizing taxes over a lifetime. A proper retirement withdrawal strategy can help you enjoy your retirement and still leave more for the next generation.
If you need help planning your retirement to draw from your accounts tax efficiently, take a look at our website and book an appointment with us.
