The article “RRSPs, DCPPs, CPP, Oh My!” was originally published on MoneySense on October 4, 2016.
Daniel has plenty of retirement options. Which should he prioritize?
Q: I’m 56 and would like to retire at 60. I have a defined contribution pension plan. Would it be wise to draw RSP only until 65 and leave CPP and DCP to grow?
—Daniel
A: I find there can be a lot of confusion around Defined Contribution (DC) pension plans, so let’s seek to clarify some things, Daniel.
First off, you ask about whether you should start to draw from your RRSP at age 60 when you retire. You don’t have to take any withdrawals before age 72, at which point a minimum annual withdrawal is required based on a percentage of the account value. Sometimes, you need to take withdrawals early because you simply need the cash flow, but sometimes, even if you have other non-registered savings or investments, early RRSP withdrawals can be wise to smooth your income and tax payable during retirement.
I think it’s important to target the least amount of lifetime tax as opposed to the least amount of tax today without regard for the future. This is particularly important when you might not only be paying more tax with delaying RRSP withdrawals, but also losing entitlement to government benefits like Old Age Security (OAS) and Guaranteed Income Supplement (GIS).
Your question on drawing on your RRSP versus your DC pension requires some discussion, Daniel. Think of a DC pension like an RRSP. If your DC pension account is from a former employer, you can transfer it into a locked-in RRSP (often called a LIRA or locked-in retirement account) right now, Daniel. This would enable you to choose investments other than the mutual funds offered by your former employer. If the DC plan you have is from your current employer, when you do retire in 4 years, you will have the opportunity to make the transfer at that time.
Depending on the investment options and fees offered by the plan provider versus your other available options, it might make sense to either keep or transfer the account to a third party.
A LIRA can have the same investments as an RRSP, whether you work with an investment adviser or you’re DIY and whether you buy stocks, bonds, mutual funds, ETFs or GICs.
The only difference with a LIRA versus an RRSP is you generally can’t take withdrawals before 55 (not applicable based on your age, Daniel) and there are maximum annual withdrawals you can take each year (percentages increase as you age).
So there is not much a distinction between drawing down your RRSP first and waiting until 65 for your DC pension. Both are effectively RRSPs. Both are taxed the same as well. And when you retire at 60, you can withdraw from either of them.
In fact, if anything, I would be inclined to withdraw from the DC pension / LIRA first since there are limits on your annual withdrawals. I would rather see you keep as much flexible retirement money intact—the RRSPs—than the LIRA with its maximum annual withdrawal limits.
On CPP, whether you wait until 65 to start your withdrawals depends on a few factors as well. If you don’t need the cash flow at 60, which is the earliest you can begin your withdrawals, delaying until as late as age 70 may make sense in some situations as the pension increases the later you take it. For example, factors like a long life expectancy, a low-risk tolerance or a spouse who won’t receive the maximum CPP (and would, therefore, receive a survivor benefit if you died young) might cause you to lean towards delaying CPP.
You didn’t make mention of Old Age Security (OAS), Daniel. It’s a pension, like CPP, generally payable at 65. You do have the option to defer it as late as age 70 as well and receive a higher pension. It might not be as lucrative as your CPP pension, but it may be pretty close in terms of dollar amount if you’ve lived in Canada most of your adult life.
In summary, RRSPs and DC pensions are effectively the same thing, especially from an investment and taxation perspective. It can be beneficial to start RRSP / DC pension withdrawals early, even if you don’t need the money. DC pensions have limitations on the annual maximum withdrawal. You have the option to delay CPP and OAS pension income as late as age 70. Finally, if you’re trying to figure out the right mix of retirement income, a retirement plan to model your retirement income sources can be a useful tool to consider with a professional financial planner.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
