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Question from Roger Siemens, 63, Chilliwack, B.C.: Upon retirement, how do you determine an orderly withdrawal of funds? A well-thought-out withdrawal would seem to stretch the life of an individual’s nest egg. Most of our funds are registered, so I’m thinking that although tax issues are usually an important consideration, being that our funds are mostly registered, it doesn't really come into play. I’m thinking in terms of order being based on best dividend yield and best performance on given stocks.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc.
“Since I don’t have the holdings of your portfolio I will answer your question in general terms. The primary questions I would have are: What is going to be the final purpose of the assets being withdrawn from the retirement savings plans (RSPs)? Is it to pay for your living expenses? Do you have enough capital that the assets are going to continue to pay you an income for you to use? Do you have an estate plan that sets your wish to maintain as much capital as possible to pass onto your heirs or are you intending to use the capital?
“I will give you some thought points to consider and that may help to guide you. Firstly, if you intend to withdraw cash then first look at what may no longer be suitable for your portfolio. Selling it may raise enough cash. If not, and your account is fee-based, then you can sell a proportional amount from each holding to reduce it incrementally and not disturb the asset mix. You can also elect to withdraw assets by transferring some investments ‘in kind’ or as the existing securities.
“Any fixed-income instruments that pay you income in the form of interest should stay in the registered plans as long as possible. If you plan to withdraw cash, then planning a ladder of maturity dates by year to satisfy the annual withdrawals is advised.
“U.S. companies that pay a dividend are also best held in a registered plan (meant for retirement purposes, so a tax-free savings account is not included) because the dividend is not subject to a non-residency withholding tax. If the same security is held in a non-registered account or TFSA, there is 15 to 25 per cent tax deducted. The percentage amount is contingent on whether you have filed a W8BEN form or not.
“Canadian dividend-paying stocks would be my first choice to withdraw ‘in kind’ because once in a non-registered account the dividends will qualify for the dividend tax credit.
“Mutual funds and exchange-traded funds will have the same consideration as stocks providing that they are not bonds funds or balanced funds. Those obviously are viewed differently.
“Once investments are transferred into a non-registered account, they in turn can be contributed into a TFSA within the allowable limit.
“The possibility of the future capital gain or loss is also important to look at when trying to decide which investment to sell. Some additional tax planning and research is always a good idea, especially before retiring. I should remind you that RSPs are merely tax deferral accounts and not intended to be tax avoidance.
“Finally, I will strongly advise to you that a will and estate review is a good starting point when doing retirement planning. Seeking the advice from professionals in these areas would be useful and they would have insight into strategies and tax advantages that you may not have knowledge of.”