The article “A strategy for non-registered and TFSA accounts in retirement” was originally published in MoneySense on March 1, 2023 . Photo by Felicity Tai from Pexels.

Between a TFSA and non-registered accounts, what is the most tax-effective way to withdraw to fund retirement?

“I’ve got approximately $500,000 in non-registered investments. My TFSA is maxed out at $88,000.

I’m planning on making yearly withdrawals from my TFSA in the amount of 4% of my non-registered capital from age 65. This works out to $18,000 withdrawals from my TFSA account. 

Replacement of this amount from the non-registered account each year will keep the TFSA maxed out in the new year. 

What do you think of this strategy?”  Steve

TFSA withdrawals in retirement

Tax-free savings accounts (TFSAs) are great because they are almost always tax-free. An account holder does not report interest, dividends or capital gains on their tax return. Withdrawals are tax-free as well. The only tax on a TFSA is on the dividends paid by foreign stocks, which will generally have 15% to 25% withholding tax levied before hitting the TFSA account.

As a result, Steve, your TFSA withdrawal strategy will not trigger any income tax, assuming that is one of your goals. Any withdrawals you take will be added to your TFSA room in the subsequent year along with the new annual limit for that year. So, you are correct that you will have room in your TFSA the subsequent year.

Withdrawals from a non-registered account in retirement

It sounds like you are avoiding withdrawals from your non-registered account to avoid tax. That said, it is a common misconception that if you take a withdrawal from a non-registered account, it triggers tax.

It may trigger a capital gain if you sell an investment for a profit. However, leaving your interest and dividends in the account does not make them tax-free, Steve. Nor does reinvesting the dividends into new shares or units of a stock, exchange traded fund, or mutual fund.

You will receive a T5, T3, or T5013 slip for the annual dividends and interest earned, regardless of whether you withdraw from the account. As a result, I am not sure that withdrawing from your TFSA instead of your non-registered account is the best approach.

Withdrawal strategy in retirement—and an exception

I would generally advise someone to contribute to their TFSA and not take withdrawals, as long as they have non-registered investments to do so. Ideally, you would do this each January to put the funds to work on a tax-free basis as soon as possible.

One exception to this rule may be if you have non-registered investments with significant capital gains, Steve. Selling the investments to fund your withdrawals or transferring them in kind to your TFSA could result in a large capital gain.

There may be a scenario when taking a TFSA withdrawal or not contributing to your TFSA despite having non-registered funds is preferable. But this would be the exception to the rule.

If you have a registered retirement savings plan (RRSP) or similar tax-sheltered account, you may want to consider the benefit of taking withdrawals at 65, rather than waiting until age 72. You may be able to use up low tax brackets early and pay less lifetime tax by doing so.

You should consider the timing of your Canada Pension Plan (CPP) and Old Age Security (OAS) pensions, Steve, as well as any potential means-tested federal or provincial government benefits to which you may be entitled.

Retirement planning strategy is often tax-driven in part, so it is important to understand the different tax implications related to retirement. Investment income, account withdrawals, and pensions all trigger different types of tax consequences. Minimizing lifetime tax while considering current year tax is an important way to spend more in retirement or leave a larger estate for your beneficiaries.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.