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Most Canadians are advised to delay their Canada Pension Plan (CPP) and Old Age Security (OAS) benefits to age 70, if possible, but are left with the question of how to withdraw other retirement income tax efficiently until then.
For more straightforward portfolios, the advice is often to start taking money out of non-registered accounts first and leave funds inside registered retirements savings plans (RRSPs), registered retirement income funds (RRIFs) or tax-free savings accounts (TFSAs) because of their tax advantages.
However, the strategy may be more nuanced if the investor has other sources of taxable income or a major one-time expense.
“Each client is going to be very different and will have their own unique set of circumstances and tax implications,” says Kathryn Del Greco, senior investment advisor with Del Greco Wealth Management at TD Wealth Private Investment Advice in Toronto.
Why wait to take CPP and OAS?
If a person chooses to wait, each year CPP is deferred after age 65, their payments increase by 8.4 per cent. That means starting at age 70 increases the sum by 42 per cent versus starting at age 65. If collecting OAS is deferred to age 70 from age 65, the benefit amount will increase by 36 per cent.
The average Canadian who takes CPP or the Quebec Pension Plan at age 60 – which is the earliest possible – instead of waiting until age 70 can lose more than $100,000 of “secure, worry-free retirement income that lasts for life and keeps up with inflation,” according to a 2020 report by Toronto Metropolitan University’s National Institute on Ageing (NIA) and the FP Canada Research Foundation.
“If you’re in a position financially that you can delay the payment, it’s quite significant,” Ms. Del Greco notes.
Waiting longer also transfers the risk from personal savings to inflation-protected government benefits received for life.
Despite those obvious benefits, the NIA report says less than 1 per cent of Canadians delay their CPP. Many choose to take the funds sooner because they need the money or worry they won’t live long enough to take advantage of the government benefits.
Still, “if you’re in good health, and cash flow is not an imminent issue ... it’s much better to wait until age 70,” Ms. Del Greco says.
Income strategies for those who wait
For those who delay CPP and OAS and need retirement income in the meantime, Ms. Del Greco says a general rule of thumb is to withdraw funds from non-registered accounts first because they’re less tax-efficient than registered accounts.
She says someone might take money from a TFSA if they need additional money in a particular year because the withdrawal is tax-free and the money can be put back in the account the next year without losing any contribution room. That’s unlike an RRSP withdrawal, in which the money taken out is taxed and the contribution room is lost.
“The TFSA is a terrific tool for reasons like this,” Ms. Del Greco says.
An RRSP could be a better source of income for retirees who don’t have non-registered retirement income they can use up first, she says, or if they have a large RRSP they want to draw down sooner. For example, Mr. Del Greco notes that RRSPs can only be transferred to a spouse or child upon death, so a single person may wish to use up more of their RRSP earlier in retirement.
“There’s not one answer for everyone,” Ms. Del Greco says.
Jennifer Tozser, senior wealth advisor and portfolio manager with Tozser Wealth Management at National Bank Financial Wealth Management in Calgary, says she uses a mix of withdrawal strategies for both registered and non-registered accounts for retirees.
That may mean paying higher taxes in some years, but it could also help investors avoid taking out more income than they want later in life, which could result in a clawback of their OAS benefits.
She says the strategy is further complicated when business owners withdraw income from their corporations in retirement.
“The timing of when you move money from your corporation to your personal account and incur the tax has to be done with a tax professional,” Ms. Tozser says.
For example, she says some business owners might consider taking out a huge chunk of income from their corporation in one year, paying the tax, and losing the OAS for that year. The business owner can then invest the funds in personal tax-efficient accounts such as a TSFA or RRSP, if possible.
Dami Gittens, senior wealth planning associate and client relationship manager at Nicola Wealth Management Ltd. in Vancouver, says investors might want to take more out of RRSPs in their 60s depending on how much is saved to lower their overall income when they start receiving CPP and OAS.
Investors over 65 years of age can also take advantage of the pension income tax credit, a non-refundable federal tax credit on up to $2,000 of eligible pension income. While not a huge sum – the federal tax credit rate is 15 per cent with a maximum federal tax savings of $300 – it helps reduce taxes.
“Even if you don’t need the funds between ages 65 to 70, I recommend people take advantage of it,” Ms. Gittens says.
She adds it’s important for investors to start thinking about retirement withdrawal strategies well before they reach the traditional retirement age.
“I would say age 55 is a great time to start looking at it more closely,” Ms. Gittens says. “By then, you’re starting to get a clearer picture of what your retirement income will look like. It gives you a bit more wiggle room to plan accordingly.”
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