When Should You Start Drawing from Your RRSP or TFSA in Retirement?

Deciding when to start withdrawing from your RRSP (Registered Retirement Savings Plan) or TFSA (Tax-Free Savings Account) can significantly impact your tax situation and long-term retirement savings. The decision of when to begin taking withdrawals isn’t always straightforward, and the timing can affect your overall retirement strategy.

In this blog, we’ll explore the factors you need to consider to make the best choice for your financial future.

• Understand the Tax Implications of RRSP Withdrawals RRSPs are tax-deferred accounts, meaning you don’t pay taxes on your contributions until you withdraw the money. When you start drawing from your RRSP, it will be taxed as income, and the amount you withdraw will be added to your taxable income. This means that if you withdraw too much in one year, you could find yourself in a higher tax bracket.
  Tip: Consider spacing out your RRSP withdrawals over several years to minimize your tax burden.

• Withdraw from Your TFSA First Unlike an RRSP, withdrawals from your TFSA are not taxed. The contributions you make to a TFSA are after-tax, meaning you don’t pay taxes when you take the money out. Since TFSA withdrawals don’t affect your taxable income, they’re an excellent option for those looking to minimize taxes in retirement.
  Tip: Withdraw from your TFSA first to allow your RRSP to continue growing tax-deferred for as long as possible.

• The Role of Government Benefits Your decisions about when to draw from your RRSP or TFSA should also take into account government benefits such as CPP and OAS. For example, if you start taking CPP early, it will reduce your monthly benefit. Similarly, OAS benefits are income-tested, so a higher withdrawal from your RRSP could reduce your OAS benefits.
  Tip: Consider waiting until you’re older (e.g., age 70) to begin drawing from your RRSP to avoid reducing your OAS benefits.

Conclusion:

The timing of your RRSP and TFSA withdrawals should be based on a strategy that minimizes taxes and maximizes your long-term retirement security. By considering factors like tax implications, government benefits, and your income needs, you can make smarter decisions that allow your retirement savings to work for you. Consulting a financial planner will help you tailor this strategy to your unique needs.