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We are in the age bracket where we must take RRIF withdrawals every year. I am 81 and my husband is 82. We also have a non-registered investment account and need to withdraw additional funds to cover our expenses. We have already taken this year’s mandatory RRIF withdrawal and our TFSAs are fully funded. I know there are pros and cons to withdrawing from registered versus non-registered investments. Is one generally preferable over the other? My oldest sibling is 99 and I have four other siblings in their 90s. My husband, who was an only child, had parents who lived to 84 and 89.
–Isabelle
Which account is best for a retiree to withdraw from?
Isabelle, this is a common and important question: should you take additional cash from your non-registered account or from a registered retirement income fund (RRIF)? The answer depends on many factors — taxes, possible income-tested benefit reductions, future spending needs, life expectancy, portfolio returns and more.
People often adopt simplified rules of thumb. One frequent idea is: if you have a large RRIF, a substantial portion will be taxed on death, so it’s better to withdraw more from the RRIF now while you may be in a lower tax bracket. That reasoning contains elements of truth, but it can be misleading when applied without a personalised analysis.
In many cases I model, the opposite approach is better: withdraw from non-registered accounts first and take only the RRIF minimums. To illustrate the trade-offs, I’ll run a sample scenario based on reasonable assumptions so you can see how the outcomes compare.
Pros and cons of RRIF withdrawals
RRIFs offer several advantages that are often overlooked:
- Tax-deferred compounding inside the plan.
- Eligibility for pension income splitting after age 65, which can lower household taxes.
- Designation of a beneficiary or successor owner to simplify estate transfer.
- Potential creditor protection in some circumstances.
On the other hand, there are downsides to RRIFs:
- Mandatory minimum withdrawals each year.
- All RRIF withdrawals are fully taxable as income.
- Withholding tax can apply to withdrawals above the minimum, meaning you prepay tax and lose the investment growth on that prepaid amount.
By contrast, withdrawing from a non-registered account typically means tax on capital gains is paid later (when you file your return for the year), so you don’t lose growth to prepaid withholding in the same way.
A sample withdrawal planning scenario
For this model I’ll assume the following portfolio and planning inputs: $400,000 in a non-registered account with an adjusted cost base (ACB) of $250,000; $225,000 in each spouse’s RRIF; and $135,000 in each TFSA. I’ll use a 2% inflation assumption and a 5% portfolio return. For the purposes of the example I’ll assume your husband passes at age 90 and you at age 100.
Including standard government benefits (Canada Pension Plan and Old Age Security) and the RRIF minimums, the household should have roughly $70,000 of after-tax income per year. I also assume you top up and maximize TFSA contributions each year using money from the non-registered account when possible.
Now suppose you need an additional $20,000 after tax each year. Where should that money come from — the RRIF or the non-registered account?
In this scenario, withdrawing the extra from the RRIF while keeping other spending the same produces a final after-tax estate of about $911,500, with total taxes of roughly $14,900. If instead you take the extra money from the non-registered account first, the final after-tax estate is approximately $924,633, with taxes near $15,100.
The difference is small. Situations like this show that there isn’t a universal winner; outcomes often depend on detailed year-by-year tax planning and on how long you live. When the projected differences are minimal, it makes sense to manage taxes annually rather than commit to a single lifelong rule.
If you were certain you would both pass within a few years, drawing more from the RRIF could make sense. But if you expect to live a long time, RRIFs naturally deplete over many years as minimum withdrawals rise; notably, minimum withdrawal rates accelerate as you age and can reach very high percentages late in life.
In short: run or ask for simple year-by-year tax projections for different withdrawal options, and make decisions based on your expected longevity, cash needs, benefit eligibility and the current tax picture. For many couples, taking only RRIF minimums while using non-registered funds for extra spending is a reasonable and tax-efficient approach, but exceptions exist and periodic reassessment is important.
Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (IIROC). Allan can be reached at [email protected].
Related topics on financial planning:
- Registered or non-registered GICs: which is right for you?
- Tax-efficient retirement strategies for Canadians.
- Managing non-registered and TFSA accounts in retirement.
- Should you withdraw from non-registered accounts or TFSAs in retirement?