Registered vs non-registered accounts: Where retirees should make withdrawals

It’s one of those questions where, the more you think about it, the more complicated it becomes. There are tax considerations, claw backs, tax credits, changes in your future spending, life expectancy, rates of return, and so much more.

What tends to happen with hyper-complex questions like this is we use oversimplistic stories or explanations, whether they’re true or not, to help us decide. Take this explanation: If you have a large RRIF, on your death you might pay close to 50% of it in tax. Therefore, it makes sense to draw extra money from your RRIF account today, while you are in a lower tax bracket. That way your estate will pay less tax. 

That explanation is built on some “truths,” making it easy to believe that withdrawing extra from your RRIF is the correct thing to do. 

However, the reality may be quite different. Many times, for many clients, I’ve modelled the opposite strategy as the best solution, withdrawing extra from your non-registered account and taking only the minimum from your RRIF.  

I’m going to hypothesize some of your numbers so I can model it for you. This should help give some guidance for understanding which approach is best.  

Pros and cons for RRIFs

Here are a few of the potential benefits of having money in a RRIF:

• Tax-free compounding (probably the most overlooked benefit)
• Qualifies for pension income splitting after age 65
• Beneficiary or successor owner designation
• Creditor protection

And some of the negatives are:

• Mandatory minimum RRIF withdrawals
• Withdrawals are 100% taxable
• Mandatory withholding tax on withdrawals over the minimum 

For the last point, you are prepaying tax and losing the investment growth on that prepaid money, whereas, with a non-registered withdrawal you don’t lose the growth on prepaid tax because the tax isn’t paid until the following year.

Planning for withdrawals 

To model this, I’ll assume you have $400,000 in a non-registered account with an adjusted cost base (ACB) of $250,000, $225,000 in each RRIF, and $135,000 in each tax-free savings account (TFSA). I will also account for inflation of 2% and assume you’re earning 5% on your portfolio. For the sake of the example, I’ll say your husband passes at age 90 and you at age 100.

With Canada Pension Plan (CPP), Old Age Security (OAS) and the minimum RRIF withdrawals, you should have an after-tax income of close to $70,000 a year. I will account for maximizing your TFSA each year with money from your non-registered accounts.

Now, let’s assume you need an additional $20,000 after tax. Where should you draw that money? Your non-registered account or your RRIF?

If you draw the extra from the RRIF and keep your spending the same, even after your husband passes, you will have a final after-tax estate of $911,500. The taxes were just $14,900.    

If you draw the extra money from the non-registered first, you will have a final after-tax estate of $924,633 and taxes were just $15,100.

There is virtually no difference, and I see this often. In a case like this, what it means is that you should do your tax planning year to year, rather than try to pick one strategy to follow for a lifetime.

Isabelle, if you knew you were both going to die within the next five years, then it would make sense to draw a little more heavily from the RRIF account. But, you’re expecting to live a long life.

Also, keep in mind that RRIF accounts naturally deplete over time if you live long enough. Each year the minimum RRIF withdrawal increases and eventually at age 95 the minimum withdrawal rate is 20%. 

Hope this helps bring light to withdrawing from registered and non-registered accounts.

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.ca). Allan can be reached at alnorman@allan-normanfinancial.ca.

Read more on financial planning:

• Registered or non-registered GICs: Which should you buy?
• Tax-efficient retirement strategy options for Canadians
• A strategy for non-registered and TFSA accounts in retirement
• Should you withdraw from non-registered or TFSA investments in retirement?

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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