Withdrawing RRSPs in Retirement

Turning savings into steady, tax-smart income is the final step of your RRSP journey. The rules are straightforward once you see how withdrawals, RRIFs, and tax interact. Use this practical guide to choose when to draw, how much, and in what order relative to TFSA and non-registered assets.

RRSP to RRIF: the age-71 milestone

By December 31 of the year you turn 71, each RRSP must be converted to a Registered Retirement Income Fund (RRIF) or an annuity. RRIFs continue tax-deferred growth but require minimum annual withdrawals starting the next year. These minimums are based on age (or a younger spouse’s age if you elect it at setup), and they’re fully taxable as income.

Lump sums vs. RRIF withdrawals

• Lump-sum RRSP withdrawals: Trigger withholding tax at source. The withholding is a prepayment, not your final tax. The actual tax depends on your total income and province when you file your return.
• RRIF minimums: Not subject to withholding by default, but they’re still taxable. You can elect additional withholding if you want to avoid a tax bill at filing time.
• RRIF in-kind withdrawals: You can withdraw securities rather than cash. The market value becomes taxable income at the time of withdrawal.

The “bridging years” strategy (60–71)

Many Canadians retire before age 71 with modest taxable income. Those years are golden for optional RRSP withdrawals or early RRIF conversion to smooth taxes across your lifetime. Taking some income in the 60s can:

• Reduce large RRIF minimums in your 70s and 80s.
• Lower the risk of OAS clawback by keeping future income under thresholds.
• Let you fill up lower tax brackets each year (a “top-up” approach) rather than paying higher rates later.

Where TFSA fits

Think of TFSA as your tax-free buffer. In years when taxable income is already high—say, you realize capital gains or have large RRIF minimums—draw spending money from the TFSA to avoid pushing yourself into a higher bracket or triggering OAS clawback. Conversely, in low-income years, you might prioritize RRSP/RRIF withdrawals and then move any surplus into TFSA for future tax-free flexibility.

Withdrawal sequence basics

There’s no one-size playbook, but here’s a common order that balances taxes and flexibility:

1. Use non-registered assets that generate high ongoing taxes (e.g., interest-heavy holdings) to reduce future drag.
2. Withdraw moderate amounts from RRSP/RRIF in the bridging years to fill lower brackets.
3. Use TFSA as a flexible top-up or buffer to keep taxable income smooth.
4. In advanced age, revisit sequence if healthcare costs rise or if estate goals favour TFSA preservation.

Spousal considerations

If you used spousal RRSPs, the annuitant spouse reports RRIF income. Aim to keep both spouses’ taxable income in similar brackets. Pension income splitting on the tax return can further optimize outcomes for certain types of pension income (including qualifying RRIF income at or after age 65). Review annually; small adjustments to who withdraws what can shave thousands off lifetime taxes.

Cross-border note: RRSP withdrawals if you live in the U.S.

RRSP/RRIF withdrawals to a U.S.-resident are generally taxable in Canada and may also be taxed in the U.S., with relief via foreign tax credits under the treaty. Custodians may apply Canadian non-resident withholding. Filing in both countries is normal; the exact net depends on your state, treaty rates, and your overall income. Plan ahead and keep documents.

Estimating taxes and avoiding surprises

• Add provisional withholding: If you expect to owe tax at filing, ask your institution to withhold a bit more on RRIF payments to smooth cash flow.
• Budget net of tax: Plan monthly spending using after-tax amounts. Your marginal rate, credits, and province matter.
• Rebalance when you withdraw: Use withdrawals as a chance to trim overweight positions and realign your asset mix without extra trades.

Common pitfalls

• Leaving everything until 71: You may end up with large RRIF minimums and higher overall lifetime taxes.
• Ignoring OAS thresholds: One big withdrawal can increase your effective tax rate via clawback. Smooth income instead.
• Not coordinating with CPP/OAS start dates: Delaying CPP or OAS while drawing modest RRSP/RRIF income can improve lifetime outcomes for some retirees.
• Asset/liability mismatch: If you need steady cash, keep a year or two of withdrawals in low-volatility holdings within the RRIF to avoid selling at market lows.

A simple annual routine

1. Project total income (RRIF, CPP, OAS, pensions, dividends) and target a tax-efficient bracket.
2. Decide how much to draw from RRIF vs TFSA to stay within that bracket.
3. Elect withholding that approximates your final tax.
4. Revisit your asset mix and refresh your next 12–24 months of RRIF cash needs.
5. Update your plan after tax season with what you learned from your actual return.

Tax laws and thresholds change. This article is educational and not individual advice. Coordinate with a professional to tailor your drawdown plan.