I am about three years from retirement (hopefully) and am purchasing units of income ETFs in my TFSA and LIRA with an eye toward using the ETF income to supplement my pension income.
I am confused about how the income from the ETFs in the LIRA would be accessed and if the income would count towards the minimum withdrawal amount.
I’m 58, looking to retire at 61.
—Garrett
Using income ETFs for a life income fund (LIF)
As you approach retirement, Garrett, it’s a good time to review your investment approach. You don’t necessarily need to change strategy if you are conservative, but more aggressive investors should consider how much and when they plan to withdraw from each account.
If you withdraw only a small portion of an account’s value, those withdrawals can often be supported by income—dividends, interest and other predictable distributions. In many cases, though, retirees must take withdrawals that exceed the income generated, which requires selling investments and dipping into capital.
It’s common for retirees to draw more heavily from some accounts while leaving others relatively untouched. For example, someone might withdraw from a non-registered account and an RRSP while continuing to contribute to a TFSA (tax-free savings account). Looking across accounts and timing withdrawals can help you manage risk and set an appropriate time horizon for each account.
Capital return vs dividends
Many investors favour dividend-focused strategies as they near retirement. Income ETFs and mutual funds typically hold dividend-paying stocks, REITs, corporate bonds and preferred shares to generate cash distributions.
However, a higher dividend yield does not guarantee a higher overall return. Some companies pay little or no dividend but still deliver strong returns through capital growth. Berkshire Hathaway is a well-known example: it retains cash to buy businesses rather than paying dividends, producing returns through share-price appreciation. Similarly, some tech companies have modest dividends yet strong long-term returns. The key point is that dividends are only one component of total return.
Dividend vs growth stocks: Which is better?
A company’s board decides whether to distribute cash as dividends or reinvest it to grow the business. Companies that pay higher dividends often have more limited growth prospects, while those that reinvest profits may offer stronger capital appreciation. That means a stock with a 5% dividend won’t necessarily outperform another with a 1% dividend; total return depends on both dividends and price growth.
How to access income in a locked-in retirement account (LIRA)
Now to your specific questions. Income ETFs can play a useful role as you near retirement, but I wouldn’t buy them solely because retirement is approaching, nor would I build a portfolio made only of income ETFs. One diversified income ETF may already provide sufficient exposure, so buying many similar funds is often unnecessary.
A locked-in retirement account (LIRA) must be converted to a life income fund (LIF) before you can take regular withdrawals. A LIF is a registered pension-style account that has annual minimum and maximum withdrawal rules. Those limits are calculated from the market value of the account on December 31 of the previous year and your age; the specific distributions paid by holdings do not directly change the minimum withdrawal amount. In short, it’s the year-end account value and your age that determine minimums and maximums, not the dividends themselves.
To access ETF income inside a LIF, make sure the ETF is set to pay distributions in cash rather than reinvesting them into additional units. Cash distributions will accumulate as a cash balance in the LIF and can be used to meet withdrawals. Still, dividend income alone often won’t cover the required minimum—or your desired spending—so you should be prepared to sell ETF units periodically to top up withdrawals.
When to consider fixed-income laddering
Another option is to supplement withdrawals with a ladder of guaranteed investment certificates (GICs) or bonds that mature each year, providing predictable cash flow to cover living costs. This approach reduces the need to sell equities during market declines and smooths income in early retirement.
Timing of government benefits—Canada Pension Plan (CPP) and Old Age Security (OAS)—also affects withdrawal planning. Depending on when you begin CPP and OAS, you might choose to take larger withdrawals early in retirement to fund travel or to preserve TFSA room. Deferring CPP and OAS can increase lifetime pension income, so many healthy retirees delay these benefits when feasible.
In practice, a blended approach often works best: hold a diversified mix of equities and fixed income, use income ETFs for part of the cash flow, keep distributions paid out in cash if you need the income, and sell units when necessary to meet LIF minimums or personal spending goals. If ETF income falls short of required LIF withdrawals, selling units or shifting some assets into a fixed-income ladder are straightforward remedies.
I hope this helps clarify how income from ETFs interacts with locked-in accounts. Income ETFs can be effective in retirement planning, but consider diversification, the mechanics of distribution payments, and the need to convert a LIRA to a LIF before taking withdrawals.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products.
Read more from Jason Heath:
- Do you pay withholding tax on U.S. ETFs?
- Should you collect CPP and OAS while working in your 60s?
- Can an estate contribute to an RESP account?
- A strategy for non-registered and TFSA accounts in retirement