Planning for withdrawals
To model this, I’ll assume you have $400,000 in a non-registered account with an adjusted cost base (ACB) of $250,000, $225,000 in each RRIF, and $135,000 in each tax-free savings account (TFSA). I will also account for inflation of 2% and assume you’re earning 5% on your portfolio. For the sake of the example, I’ll say your husband passes at age 90 and you at age 100.
With Canada Pension Plan (CPP), Old Age Security (OAS) and the minimum RRIF withdrawals, you should have an after-tax income of close to $70,000 a year. I will account for maximizing your TFSA each year with money from your non-registered accounts.
Now, let’s assume you need an additional $20,000 after tax. Where should you draw that money? Your non-registered account or your RRIF?
If you draw the extra from the RRIF and keep your spending the same, even after your husband passes, you will have a final after-tax estate of $911,500. The taxes were just $14,900.
If you draw the extra money from the non-registered first, you will have a final after-tax estate of $924,633 and taxes were just $15,100.
There is virtually no difference, and I see this often. In a case like this, what it means is that you should do your tax planning year to year, rather than try to pick one strategy to follow for a lifetime.
Isabelle, if you knew you were both going to die within the next five years, then it would make sense to draw a little more heavily from the RRIF account. But, you’re expecting to live a long life.
Also, keep in mind that RRIF accounts naturally deplete over time if you live long enough. Each year the minimum RRIF withdrawal increases and eventually at age 95 the minimum withdrawal rate is 20%.