Withdraw from TFSA or Non-Registered Investments in Retirement?

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I have stocks in my TFSA as well as some that are non-registered. I am at the point in my life (retired) now that I’d like to begin selling them and using the money. Do I sell from the TFSA account or just from the non-registered portfolio?

—Catherine

TFSA versus non-registered withdrawals in retirement

Good question, Catherine. The right choice depends on several factors. Below is a concise primer on how dividend and capital gains taxation works, followed by practical guidance to help you decide whether to withdraw from a TFSA or from a non-registered account in retirement.

How dividends are taxed

Dividends in a non-registered account are taxed in the year they are received, whether you withdraw the money or reinvest it (for example, through a DRIP). Canadian eligible dividends benefit from a dividend tax credit that can substantially reduce tax at lower income levels. For example, an Ontario taxpayer with under $49,000 of income in 2023 could see an effective tax benefit on eligible dividends that is equivalent to roughly a negative 7% marginal rate for that slice of income.

Foreign dividends, and interest from bonds or GICs, do not get the same favourable treatment as Canadian dividends. They are taxed at ordinary income rates and can be substantially higher than the tax on Canadian eligible dividends. For a taxpayer with $49,000 of income, the marginal tax on additional foreign dividend or interest income might fall in a much higher range depending on the province.

How capital gains are taxed

Capital gains receive preferential treatment: only 50% of a capital gain is taxable. That means if you realize a capital gain in a non-registered account, only half of the gain is added to your taxable income. The effective tax on the gain depends on your overall marginal tax rate; at modest income levels, the implied tax on a capital gain is much lower than on interest or foreign dividends. At higher income brackets, all of these taxes rise, but capital gains remain only partially taxable.

Tax treatment of your TFSA

TFSAs shelter investment income from Canadian tax: dividends, interest and capital gains earned inside a TFSA are not taxed when earned or when withdrawn. The primary exception is withholding tax on foreign dividends, which is generally charged at source and cannot be recovered in a TFSA. Otherwise, income and withdrawals are tax-free, and contribution room is restored the year after you withdraw funds.

So, which should you choose: TFSA or non-registered withdrawals?

The decision matters most when your non-registered holdings include large, unrealized capital gains. Selling non-registered investments will trigger capital gains tax, whereas withdrawing an equivalent amount from your TFSA is tax-free. But the trade-offs extend beyond the immediate tax bill.

Consider a simple example: you hold stock in a non-registered account that you bought for $5,000 and that is now worth $10,000. Selling would realize a $5,000 gain; only $2,500 would be taxable, producing a tax bill depending on your marginal rate. If you are a high-income retiree, you might pay roughly $1,250 in tax on that sale (this assumes a 25% effective tax on the taxable portion for illustration). Instead, you could withdraw $8,750 from your TFSA to net the same after-tax cash without incurring tax today.

At first glance the TFSA withdrawal looks preferable. But you must weigh the long-term value of keeping assets inside the TFSA. Income and growth inside the TFSA compound tax-free, while the non-registered fund will continue to accumulate deferred taxes on future gains and taxable income. For instance, if a Canadian stock yields a 2.5% dividend and your marginal tax on dividends is high, holding that stock in the TFSA avoids ongoing dividend tax each year. If the stock also grows in value, keeping it in the TFSA avoids future capital gains tax too. Those annual tax savings accumulate and compound over time.

Choosing to sell non-registered holdings now to preserve TFSA balances may be justified in some situations, but it often means paying a meaningful tax today to avoid a stream of smaller tax bills in the future. Whether that up-front tax is worth it depends on rates of return, dividend yields, your expected lifespan, whether you plan to rebalance or trade frequently, and other personal circumstances.

Some general rules to follow

There is no one-size-fits-all answer, but these practical guidelines can help:

Prefer non-registered withdrawals when you are in a high tax bracket and would otherwise trigger large capital gains.
Consider TFSA withdrawals if your non-registered gains are modest and you want to preserve tax-free growth for high-yield or fast-growing holdings.
Use non-registered cash first if you already hold liquid cash there, avoiding unnecessary realization of gains in other accounts.
If you or your advisor frequently trade, realize gains and losses strategically rather than automatically preserving TFSA balances.
Take age, life expectancy, and your spouse’s life expectancy into account: longer horizons increase the value of tax-free compounding inside a TFSA.
Avoid letting a desire to defer capital gains lead to a highly concentrated or undiversified portfolio—tax deferral is not worth excessive risk.

Final thoughts

Deciding whether to withdraw from a TFSA or a non-registered account in retirement involves weighing immediate tax costs against the long-term benefits of tax-free growth. Run scenarios using financial planning tools to compare after-tax retirement income and potential estate outcomes under different strategies. In many cases it makes sense to prefer non-registered withdrawals when realizing gains would produce a lower overall tax burden, while preserving TFSA assets for investments that benefit most from tax-free compounding. But every situation is unique—model the options or consult a fee-only advisor who can project the after-tax outcomes for your specific holdings.

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.