Canadian investors use earnings from their self-directed Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) to complement OAS, CPP, and company pensions in retirement. Deciding when to pull the money out of these funds, however, requires some strategic planning to minimize the tax impact.
TFSA benefits
All interest, dividends, and capital gains earned inside a TFSA are not taxed. In addition, any money removed from the TFSA is also tax-free and can go straight into your pocket without worrying that it will bump you into a higher tax-bracket or put Old Age Security (OAS) at risk of a clawback. These are important considerations when deciding when to pull the funds for retirement spending.
In many cases, it would make sense for retirees to start TFSA withdrawals when their retirement income from other sources is at its highest. This is normally when a person starts to collect CPP and OAS, along with other pension income. These income streams are all taxable as earned income and can potentially trigger the OAS pension recovery tax. This is a 15% clawback imposed by the CRA on OAS payments when net world income tops a minimum threshold. The number to watch in the 2026 income year is $95,323. People who collect full CPP and OAS, along with generous work pensions, can quite easily approach this amount. As such, it makes sense to try to minimize the OAS clawback, when possible.
RRSP benefits
RRSP contributions can be used to reduce taxable income. This makes the RRSP an attractive financial planning tool, especially for Canadians with high incomes. The invested money is also able to grow tax-free while it is held inside the RRSP.
Withdrawals, however, are taxed as regular income. Ideally, a person would make RRSP contributions at a high marginal tax bracket and then remove the funds as retirement income at a lower tax rate.
As such, people who are able to retire early should consider pulling money out of their RRSP before tapping their TFSA, particularly in the years before they start to collect CPP and OAS. This can reduce the tax hit on the funds while providing steady income to bridge the gap between the time someone retires and when the person decides to start collecting the government pensions.
Taxable accounts
People who are able to maximize their allowable TFSA and RRSP contributions will often put excess savings into taxable investment accounts. Interest, dividends, and capital gains earned in these accounts are taxed in the year they occur. As with the RRSP, it makes sense to plan to trigger taxable income at the lowest-possible marginal tax rate.
Dividends and capital gains are taxed at lower rates than interest income. This is important to consider when planning the retirement income stream. One popular investing strategy for taxable accounts is to hold top dividend-growth stocks.
Enbridge (TSX: ENB) is a good example of a stock that generates dividend growth and offers a high yield.
The energy infrastructure giant has increased its dividend for 31 consecutive years. Investors who buy the stock at the current price can get a dividend yield of 5.7%.
The bottom line
Each person’s situation is different when it comes to deciding when to access funds from the various retirement sources, but a little planning ahead of time can have a big impact on how much of the income stays in your pocket.