Many retirees focus on growing their investments, but few realize the tax savings they can unlock simply by choosing the right time to withdraw from their RRSPs
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Their Situation
Jim and Crystal came in for a planning meeting to explore ways to optimize their portfolio withdrawals.
Crystal had been retired for three years. Jim was still working and planned to continue for another two. Because they were living off Jim’s salary, Crystal hadn’t touched her RRSP. Her plan was to leave it alone until they both stopped working.
What They Could Have Done
Since Crystal had no employment income, she had room to make withdrawals from her RRSP without triggering income tax.
In Canada, both federal and provincial tax rates start at around $15,000 of income. That means if your total income is below this threshold, you won’t owe any tax. Technically, there is some withholding tax when RRSPs are withdrawn, but it gets refunded when taxes are filed.
Crystal could have withdrawn $15,000 each year over the last three years without paying any tax at all. That’s over $45,000 she could have moved out of her RRSP tax-free.
Why This Strategy Matters
RRSPs are fully taxable when withdrawn, which means it’s important to take advantage of low-income years. For retirees who stop working before starting CPP or OAS, this creates a valuable window to pull money from their RRSP at a lower tax rate.
Had Crystal taken withdrawals during these low-income years, she could have reduced the size of her RRSP and the future tax bill on those funds. She also could have reinvested those withdrawals into a TFSA or used them to support other goals.
What You Can Learn from This
If you or your spouse has years with little or no income before government benefits begin, there may be an opportunity to withdraw from your RRSP at a very low or even zero tax rate.
This doesn’t mean everyone should start withdrawing right away. The right approach depends on your full retirement income picture. But ignoring those low-income years could mean missing out on significant tax savings.
Final Thoughts
Jim and Crystal’s case is a powerful example of how timing can play a major role in tax-efficient retirement planning. Over $40,000 could have been withdrawn tax-free, simply by recognizing the opportunity and taking action.
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