How to manage your funds in retirement

As the sun sets on a lifelong journey of hard work and dedication, the much-anticipated golden years beckon, promising a period of relaxation and fulfillment. Retirement, often hailed as the threshold to these golden years, marks a significant transition in one's life. Beyond the excitement of this stage lies the need for prudent financial planning to ensure a comfortable, wealthier and more satisfying retirement.

Your retirement is as unique as your fingerprint; your plan should reflect that. Here's a guide to help you manage your retirement income.

Before picking out beachfront properties or planning cross-country trips, it's time to determine your retirement income sources. Knowing where your money is coming from is like having a GPS for your budget, whether it's employer-sponsored pension plans, government benefits, or personal savings.

In Canada, key sources include the Canada Pension Plan (CPP), Guaranteed Income Supplement (GIS), and Old Age Security (OAS). Understanding what you can expect from these sources will help you plan your budget effectively.

It’s crucial to understand the tax implications of your retirement funds, as different types of retirement accounts have varying tax treatments for withdrawals. Strategic planning can help minimize your tax burden and help you make informed decisions on which accounts to contribute to and withdraw from during retirement.

Registered Retirement Savings Plans (RRSPs): Contributions made to an RRSP are tax-deductible, meaning they reduce your taxable income for the year they are made. The investments within the RRSP grow tax-free. However, when you withdraw funds from an RRSP in retirement, those withdrawals are taxed as income at your marginal tax rate. Also worth mentioning is the First Home Savings Account (FHSA), which is designed to help people save for their first home purchase. If you open an FHSA but do not use it for a home purchase, there is an option to roll the funds into your RRSP. This additional contribution does not impact your RRSP limits. So while the FHSA isn't primarily a retirement account, under specific circumstances, its funds can be transferred to an RRSP.

Tax-Free Savings Accounts (TFSAs): Contributions made to a TFSA are not tax-deductible, but the investments grow tax-free within the account. Additionally, withdrawals from a TFSA are tax-free, which means you won't pay taxes on the money you take out, even if the account has grown significantly.

Registered Retirement Income Fund (RRIF): At age 71 in Canada, if you have an RRSP, you must convert it into a RRIF or another registered retirement income option. With a RRIF, you still get to keep your investments and let them grow tax-free, but you must withdraw a minimum amount from the RRIF each year based on a government-determined formula. This minimum withdrawal amount increases yearly, meaning you will gradually draw down your RRIF over time.

Planning your RRIF withdrawals is essential for balancing your financial needs with the desire to minimize tax implications. Withdrawing more than the minimum will increase your taxable income, potentially pushing you into a higher tax bracket (and crossing clawback thresholds for OAS or other pensions). However, withdrawing less than the minimum can result in penalties.

Strategies such as income splitting with a spouse and tax-efficient investments can be beneficial. 

Depending on your circumstances, it might make sense to withdraw from different accounts at specific stages of retirement. Consider factors like which accounts to withdraw from first (e.g., TFSAs before RRSPs), when to start taking government benefits, and how to handle your RRIF withdrawals to meet your financial needs while preserving your savings. Consider contacting a financial planner for further information.

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.