Decumulation Strategies: How to Withdraw from Your RRSP, TFSA, and Pension Wisely

Most Canadians spend decades saving for retirement, including by accumulating wealth through RRSPs, TFSAs, and pensions, but when it’s finally time to live off that nest egg, many retirees face a new challenge: how to withdraw their money without paying more tax than necessary and without running out of funds too soon.

Decumulation is a phase in one’s financial life during which time strategy matters just as much as it did during accumulation. Continue reading for tips on how to withdraw from your RRSP, TFSA, and pension while minimizing your tax liability.

Understand Tax Rules First

Each retirement income source is treated differently in terms of taxation:

• RRSP/RRIF withdrawals are fully taxable as income when withdrawn.¹
• TFSA withdrawals are tax-free and do not affect government benefits.²
• Pension (including CPP and Old Age Security [OAS]) withdrawals are taxable income that could trigger benefit clawbacks.³

The key to decumulation is having a plan that aligns with your lifestyle needs, lifespan expectations, and tax profile—don’t simply accept the minimum or what “feels” right. Instead, run the numbers or work with a planner to optimize your withdrawal strategy.

Consider Withdrawing from Your RRSP Early

If you retire before age 71 and have no or low income, this can be a golden window to start drawing down your RRSP before converting it to an RRIF. Early withdrawals allow you to:

• Reduce future required minimum withdrawals (and tax bills) after age 71.
• Avoid OAS clawbacks later.
• Spread your taxable income across more years.

This is especially useful if you delay CPP and OAS to maximize these benefits later.

Use Your TFSA as a Tax Buffer

Your TFSA is a powerful tool in decumulation. Because it doesn’t trigger tax or affect benefit eligibility, it acts as a flexible buffer and may help you supplement your income in years when your taxable income is high, preventing you from being pushed into a higher tax bracket. It may also fill in income gaps if you defer government pensions. You can also recontribute any withdrawals the following year, giving it ongoing utility throughout retirement.

Coordinate RRIF Withdrawals with Government Benefits

Once your RRSP becomes an RRIF (mandatory by age 71), you must take minimum withdrawals, which count as taxable income. If these withdrawals increase your income above the OAS clawback threshold, you could lose some or all of your benefits.

In response, some strategies to consider to minimize this risk include:

• Making RRSP withdrawals before age 71 to reduce your RRIF size.
• Splitting pension income with a spouse to reduce your combined tax burden.
• Delaying CPP and OAS to age 70 increases the total benefit amount and shortens the years you’ll need to fund yourself.

Don't Forget the Sequence of Returns Risk

In the early years of retirement, market volatility can be especially damaging. Withdrawing from investments during a downturn can permanently shrink your portfolio.

To guard against this:

• Keep 1–2 years of living expenses in cash or very low-risk accounts.
• Use your TFSA or fixed-income assets to cover expenses when markets dip.
• Replenish safer buckets when the market rebounds.

Rethink “Safe” Withdrawal Rules

The old 4 percent withdrawal rule is a catch-all and is not specific to your unique needs. In reality, your withdrawal rate depends on your health, market returns, inflation, and spending flexibility, so it’s worth revisiting your plan annually to adjust for changing conditions.

Decumulation is a strategic game that involves balancing taxes, timing, and risk to stretch savings and keep retirement secure. It represents a smart withdrawal plan that can add years of life to your portfolio and peace of mind to your retirement years.

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