I’ve got approximately $500,000 in non-registered investments. My TFSA is maxed out at $88,000.
I’m planning on making yearly withdrawals from my TFSA in the amount of 4% of my non-registered capital from age 65. This works out to $18,000 withdrawals from my TFSA account.
Replacement of this amount from the non-registered account each year will keep the TFSA maxed out in the new year.
What do you think of this strategy?
—Steve
TFSA withdrawals in retirement
Tax-free savings accounts (TFSAs) are valuable because investment growth and withdrawals are generally tax-free for the account holder. Interest, dividends and capital gains earned inside a TFSA are not reported as taxable income on your tax return, and withdrawals from a TFSA are also tax-free.
One exception is foreign dividends: those are often subject to withholding tax at source, typically around 15%–25% depending on the country, before the funds reach the TFSA. This withholding tax reduces the effective return on foreign dividend-paying investments held inside a TFSA and is not recoverable through Canadian tax filings.
Given those rules, your proposed approach of withdrawing $18,000 annually from the TFSA and replacing that amount from your non-registered account so the TFSA remains fully subscribed will not itself create additional income tax in the year you withdraw. The amount you withdraw from a TFSA is added back to your TFSA contribution room in the following calendar year, in addition to that year’s new TFSA contribution limit.
Withdrawals from a non-registered account in retirement
It’s a common misconception that any withdrawal from a non-registered account triggers a tax bill. Withdrawals do not directly create tax—what matters is whether you sell investments and realize gains or whether you receive interest and dividends that are taxable. Interest and most Canadian dividends are taxable in the year they are paid, even if you leave them invested in the non-registered account. Dividends and interest will be reported to you on slips such as T5 or T3, and must be included on your tax return regardless of whether you withdraw the cash.
If you sell holdings in a non-registered account for more than their adjusted cost base, you will realize a capital gain and a portion of that gain will be taxable. The decision to sell particular holdings to fund cash flows should therefore take into account unrealized capital gains and the resulting tax consequences.
Because taxable events are created by selling assets or by receiving investment income, rather than by the physical act of withdrawal, it isn’t always beneficial to prefer TFSA withdrawals over non-registered withdrawals simply to avoid tax reporting. In many cases, accessing non-registered assets first and preserving TFSA assets can be the more efficient choice, but the best path depends on the character of your holdings and your broader tax and income situation.
Retirement withdrawal strategy—and one exception
In general, a sound approach is to prioritize contributing to and retaining assets inside your TFSA when you have the capacity to do so, while using non-registered accounts to fund living expenses. Keeping money in a TFSA allows future growth to compound tax-free. If you can replace withdrawn TFSA funds from non-registered assets without triggering large realized gains, that can work well—but you should be careful about which holdings you sell to replenish the TFSA.
An important exception arises when your non-registered holdings have large unrealized capital gains. Selling those holdings to top up the TFSA or to fund withdrawals could crystallize significant capital gains and increase your tax bill. In that scenario you might prefer to take TFSA withdrawals and use lower-cost-basis non-registered holdings only when it makes sense, or to transfer low-gain assets into the TFSA instead of high-gain holdings.
Another consideration is the sequencing of withdrawals among registered accounts such as RRSPs/RRIFs and non-registered accounts. Converting RRSPs to RRIFs or making RRSP withdrawals will create taxable income in the year of withdrawal. It may be beneficial to draw from certain accounts earlier—say at age 65 rather than waiting until mandatory RRIF minimum withdrawals begin—if doing so allows you to use lower tax brackets now and reduce lifetime tax. The optimal sequence depends on projected income, marginal tax rates each year, and anticipated eligibility for income-tested federal and provincial benefits.
Think about how TFSA and non-registered withdrawals interact with government benefits such as CPP and OAS. The timing of CPP and OAS start dates influences taxable income and potential clawbacks (for example, OAS clawbacks are income-tested). A holistic plan considers pension start dates, expected investment income, and the timing of withdrawals in order to minimize lifetime tax and maximize after-tax retirement spending.
Practical steps to consider: review which specific investments sit in your non-registered accounts and estimate unrealized capital gains; model annual taxable income under different withdrawal sequences; consider holding foreign dividend payers in accounts that can recover withholding tax (for example, inside an RRSP) when appropriate; and run scenarios that include CPP and OAS timing.
Overall, your basic plan—using TFSA withdrawals that are replenished from non-registered funds so the TFSA remains fully subscribed—can work without creating immediate tax on the TFSA side. However, whether it is the most tax-efficient path depends on the nature of the non-registered holdings, the capital gains that would be realized to fund replacements, and your wider retirement income picture. For tailored advice, especially given the value of your non-registered portfolio, consider discussing specific scenarios with a fee-only financial planner or tax professional who can model tax outcomes and optimize withdrawal sequencing.
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.
Video: The differences between a TFSA and RRSP