By the time many Canadians reach retirement, they may have many sources of income to draw on, including company pensions, RRSPs, TFSAs and CPP payments. But which should you draw on first? Kim Parlee talks to Treva Newton, a tax and estate planner with TD Wealth, about what you need to know about taking money from your savings accounts in retirement.
Print Transcript
- Most of us are saving all of our working lives for retirement. We have RRSPs, and TFSAs, and CPP, in some cases, company pensions. But when it comes time to taking the money out of our savings investments, a lot of people are stuck with which they should draw on first.
Treva Newton is a tax and estate planner with TD Wealth. And she joins us now from Victoria. Treva, today's "Ask MoneyTalk" question is for you. I have a pension. I have an RRSP, TFSA, CPP. Which one should I withdraw from first when I retire?
TREVA NEWTON: So the answer to that is, it depends. It really does depend on your own personal circumstances. You have to ask yourself questions. How much money do you need? How much money do you have? How long are you going to live for? So it is a very personal question.
- So in terms of-- again, I understand what you're saying. I've got to figure out what my plans are over the years, and your goals, your health, and all those types of things. But each one of those things I mentioned, from my understanding, have different characteristics. And it may be advantageous to wait on some and not on others.
Maybe we could just run through them all so people understand. And the first one I have on the list is OAS. What is that? And how does it work when it comes time to receive that?
- Yeah. So OAS, which is your Old-Age Security, which you can start receiving at age 65. And all Canadians are entitled to this-- Canadian citizens. And it is an amount that depends on your income level. So you get your full amount. And then as your income level goes up, it is clawed back. So a lot of people try to keep their income below a certain level so that they can get their old-age security.
- Got it, OK. CPP?
- Right, so your Canada Pension Plan, which you've paid into all of these years that you've been working. And now is your time to get it out. You can start taking it at age 60 or delay it until age 70. The longer you delay, the more you're going to get. Aged 65 is the standard age to start taking it. But depending on your circumstances, you can take it early or later.
- And what might influence someone's decision on taking it earlier or later?
- What your income is and how much income you require. So if you don't have much income and you actually are retiring before the age of 60, you may need to take your CPP in order to finance what you require. So don't always take a look at what your income tax level is. Don't let that drive everything for you. Make sure that you have enough money to live off of.
- Hm. Next on the list is the RRSP. What should we be considering when looking at that?
- So again, RRSP, you've contributed all your working life. And now is the time to look at, when do I take it out? So your RRSP, when you take money out of it, it's taxable and it's taxable as income. So you need to decide how much income you need and if you actually need to take money out of your RRSP at that time.
If you need income, of course, take the money out of your RRSP if it's required. Take a look at ones you don't have control over as much. You don't have as much control over your CPP, or your OAS, or if you have a company pension. You don't have control over how much those funds are going to be. Your RRSP, before the age of 71, you do have control over how much it's going to be.
- And at, say, age 71?
- Mhm. So what happens at age 71, it turns into a RRIF. So at age 72, you have to start taking the money out. And it's a minimum amount that you have to take out every year. So you're going to have start taking in a minimum from your RRIF at age 72, and that is going to be included as your income.
- What about the TFSA? Because that's the relative new kid on the block when it comes to instruments that people have. How should that be thought of when it comes time to withdrawing for retirement?
- TFSAs are wonderful. So they are the ones that actually are tax-free. As you put the money in, it's after-tax dollars you've put into it. But they grow tax-free, and you can take the money out tax-free. So they're a really good way to supplement income in retirement.
So some people will use it to supplement their income. Other people will use it to save for other things. But it's a great time-- if you need extra income in a year but you don't want to move into a higher tax bracket, you can use your TFSA to supplement that income.
- And finally, you touched on a bit of the pension. For those people who might have a company pension, how does that play into things?
- Right. So company pensions, sometimes you can delay those, as well, like you've done with the Canada Pension Plan. You can take it as soon as you retire, or you can leave it for a few years and let it grow. And usually, you get to take a little bit more out at that point in time. But the longer you leave it, the more money you're going to get on an annual basis.
So that one, again, is taxable when it comes into your hands. And you said there's a little play with it, as far as when you can start taking it. But of course, once you start taking it, that's how much you're going to get.
- It sounds like for all of this that, you mentioned, I guess, the primary thing is figure out your life, your goals, what you're doing. But at the same time, it's your income levels and what that means for you from a taxation standpoint. Where should people go for help?
- So of course, like I said, everybody's plans are individual. Everybody has individual needs. You really need to go to your financial planner to get a plan put in place for you.
- Treva, always a pleasure. Thanks so much. Treva Newton-- she's a tax and estate planner. She joined us from Victoria. And if you would like to ask MoneyTalk a question, you can send that to moneytalk@td.com. Put "Ask MoneyTalk" in the subject line. We'll get your question. We'll find someone to answer that question for you. And you can find the responses on moneytalkgo.com.
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Treva Newton is a tax and estate planner with TD Wealth. And she joins us now from Victoria. Treva, today's "Ask MoneyTalk" question is for you. I have a pension. I have an RRSP, TFSA, CPP. Which one should I withdraw from first when I retire?
TREVA NEWTON: So the answer to that is, it depends. It really does depend on your own personal circumstances. You have to ask yourself questions. How much money do you need? How much money do you have? How long are you going to live for? So it is a very personal question.
- So in terms of-- again, I understand what you're saying. I've got to figure out what my plans are over the years, and your goals, your health, and all those types of things. But each one of those things I mentioned, from my understanding, have different characteristics. And it may be advantageous to wait on some and not on others.
Maybe we could just run through them all so people understand. And the first one I have on the list is OAS. What is that? And how does it work when it comes time to receive that?
- Yeah. So OAS, which is your Old-Age Security, which you can start receiving at age 65. And all Canadians are entitled to this-- Canadian citizens. And it is an amount that depends on your income level. So you get your full amount. And then as your income level goes up, it is clawed back. So a lot of people try to keep their income below a certain level so that they can get their old-age security.
- Got it, OK. CPP?
- Right, so your Canada Pension Plan, which you've paid into all of these years that you've been working. And now is your time to get it out. You can start taking it at age 60 or delay it until age 70. The longer you delay, the more you're going to get. Aged 65 is the standard age to start taking it. But depending on your circumstances, you can take it early or later.
- And what might influence someone's decision on taking it earlier or later?
- What your income is and how much income you require. So if you don't have much income and you actually are retiring before the age of 60, you may need to take your CPP in order to finance what you require. So don't always take a look at what your income tax level is. Don't let that drive everything for you. Make sure that you have enough money to live off of.
- Hm. Next on the list is the RRSP. What should we be considering when looking at that?
- So again, RRSP, you've contributed all your working life. And now is the time to look at, when do I take it out? So your RRSP, when you take money out of it, it's taxable and it's taxable as income. So you need to decide how much income you need and if you actually need to take money out of your RRSP at that time.
If you need income, of course, take the money out of your RRSP if it's required. Take a look at ones you don't have control over as much. You don't have as much control over your CPP, or your OAS, or if you have a company pension. You don't have control over how much those funds are going to be. Your RRSP, before the age of 71, you do have control over how much it's going to be.
- And at, say, age 71?
- Mhm. So what happens at age 71, it turns into a RRIF. So at age 72, you have to start taking the money out. And it's a minimum amount that you have to take out every year. So you're going to have start taking in a minimum from your RRIF at age 72, and that is going to be included as your income.
- What about the TFSA? Because that's the relative new kid on the block when it comes to instruments that people have. How should that be thought of when it comes time to withdrawing for retirement?
- TFSAs are wonderful. So they are the ones that actually are tax-free. As you put the money in, it's after-tax dollars you've put into it. But they grow tax-free, and you can take the money out tax-free. So they're a really good way to supplement income in retirement.
So some people will use it to supplement their income. Other people will use it to save for other things. But it's a great time-- if you need extra income in a year but you don't want to move into a higher tax bracket, you can use your TFSA to supplement that income.
- And finally, you touched on a bit of the pension. For those people who might have a company pension, how does that play into things?
- Right. So company pensions, sometimes you can delay those, as well, like you've done with the Canada Pension Plan. You can take it as soon as you retire, or you can leave it for a few years and let it grow. And usually, you get to take a little bit more out at that point in time. But the longer you leave it, the more money you're going to get on an annual basis.
So that one, again, is taxable when it comes into your hands. And you said there's a little play with it, as far as when you can start taking it. But of course, once you start taking it, that's how much you're going to get.
- It sounds like for all of this that, you mentioned, I guess, the primary thing is figure out your life, your goals, what you're doing. But at the same time, it's your income levels and what that means for you from a taxation standpoint. Where should people go for help?
- So of course, like I said, everybody's plans are individual. Everybody has individual needs. You really need to go to your financial planner to get a plan put in place for you.
- Treva, always a pleasure. Thanks so much. Treva Newton-- she's a tax and estate planner. She joined us from Victoria. And if you would like to ask MoneyTalk a question, you can send that to moneytalk@td.com. Put "Ask MoneyTalk" in the subject line. We'll get your question. We'll find someone to answer that question for you. And you can find the responses on moneytalkgo.com.
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