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Minimize taxes during drawdown from various account types in retirement
Old 01-26-2018, 05:22 PM   #1
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Minimize taxes during drawdown from various account types in retirement

Hello All! I am trying to determine the best drawdown strategy to reduce taxes paid during retirement.

I shall use round numbers to make it simpler. Account types for Canada, but I believe the approach would largely be the same with equivalent accounts in the US.
I plan on retiring at 50 years old (I live cheaply so don't need to save as much). If one is 50, retired, (and living in ON, Canada) off of the following nest egg:

$600,000 - NON-REGISTERED (Regular account)
$400,000 - RRSP (I think this is 401K, tax deferred account)
$200,000 - TFSA (I think this is Roth IRA, tax-free account)
No dept

Total $1,200,000. Rate of Return on that total is assumed to be average 8% per year in Capital Gains.

$50,000 Yearly Spending. Will be living entirely off of the 3 accounts above (NON-REG, RRSP, TFSA).

I am trying to figure out the best pattern for where to take that $50,000 every year.

Is it best to first take all of the $50,000 from the NON-REG every year until it is depleted, then from the RRSP till it is depleted, and finally the TFSA?
Or is it best to take all from TFSA until depletion, then RRSP, then NON-REG?
Or take a portion from each to make up the $50,000 every year? If so, what portion?

What pattern is best to minimize how much is gone to taxes in the end? Is there a rule of thumb?

How might one calculate this? I understand that:

TFSA withdrawals are of course tax free and don't count towards income.
NON-REG Capitals Gains are taxes at 50%.
RRSP Has withholding taxes + Capital Gains are taxes at 100%.


Theoretically, the nest egg could actually get bigger over time, thus the yearly spending could actually increase over time as well.

Thank you, any help is really appreciated!
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Old 01-26-2018, 06:33 PM   #2
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The conventional advice was to leave your RRSP alone to grow until you were forced to draw RMDs, and pay very low taxes in the meantime. The problem with that strategy is that, if you start with a sizeable RRSP and it grows at a decent percentage, you could end up being forced to take large RMDs from age 71, which would (a) catapult you into a high tax bracket and (b) cause your OAS to be clawed back (which is equivalent to paying an extra 15% in income tax). Another reason to tap into your RRSP early is that a RRIF that pays you at least $2000 per year generates a pension tax credit for that amount, provided that you are at least 65.

It really all hangs on the projected numbers. Tax policy may change radically in the 21 years between your ages 50 and 71. Return on investment is not guaranteed. In fact I think you are somewhat optimistic in estimating annualized capital gains of 8%.

I think the best approach is to try to do long term projections using software and conservative estimates for returns and tax rates. This subject has been discussed extensively at the Canadian Money Forum and the Financial Wisdom Forum. There is a poster on CMF called steve41 who has developed proprietary software called RRIFmetric, which allows you to compare projected scenarios in the Canadian context. He has been very helpful to forum members in the past when they present their questions and numbers. In most cases he seems to conclude that the long term effects are fairly similar.
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Old 01-26-2018, 06:51 PM   #3
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Thanks for the input Meadbh.

This is something that I have been thinking about for quite a while, and it is indeed a complex problem. I also could also be overlooking something.

I have been contemplating actually building software myself to calculate various scenarios, but even the tax rules are complex so I figured I'd do more research before even attempting.

Thus far I have seen a few mentions that TFSA should be the last to go. And RRSP should be the first.
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Old 01-27-2018, 12:13 PM   #4
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steve41 is semi-retired on Hornby Island. He can probably connect you with a planner near you who uses his software.
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Old 01-27-2018, 08:14 PM   #5
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I have seen many posts indicating to let the 401K grow til RMD also. I am a believer in drawing from multiple accounts to keep taxes to a minimum. The tax relief may make the 401K returns a secondary concern. I would never draw down a single account unless it was the best choice for current and future taxes. As future taxes are unknown, I would never draw an account to zero while not touching other accounts that could reduce current taxes.
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Old 01-27-2018, 08:54 PM   #6
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Interesting dilemma...I'm in pretty much the same boat as my numbers are similar although my yearly spend is around 40K....it's far off in future, but yeah I guess if you start taking some money out of the IRA at 59.5 that will in effect reduce the RMD requirement once you hit 70 as that account will have less value ....the other issue that will come up is social security...if you start taking that at 70 that could push you into higher tax bracket as well....
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