# Is there a “rule of thumb” on the order to draw down different funds in retirement?



## BC Eddie (Feb 2, 2014)

Is there a “rule of thumb” on the order to draw down different funds in retirement? For example, use lowest taxed resource first, last, ?

We are just entering our retirement and have funds in the following:
1.	Four (75%/25% Fixed income/Equities) RRSP accounts (2 regular, 1 Spousal and 1 Lira) 
2.	Two maximum contribution TFSA accounts (100% fixed income)
3.	One personal Investment account (75%/25% Equities/Fixed Income)
4.	One investment account from our business that we intend to draw down as Shareholder Dividends (100% fixed income)
5.	A sizable High Interest Savings Account(HISA) that I have maintained as a hedge against a market crash

In order to minimize income tax and thus maximize our available funds each year is there an optimum order to draw down these different sources? 
•	We also plan to defer OAS and CPP to age 70 so OAS clawback and age exemption reductions are issues.
•	Initially I thought we would live off the HISA money for the first few years but now I am thinking maybe drawing down the RRSP’s earlier in order to reduce the tax
bite when the minimum RRIF withdrawals kick in?

Any advice/input appreciated.


----------



## My Own Advisor (Sep 24, 2012)

Here's what retirement guru Daryl Diamond believes:
http://www.myownadvisor.ca/daryl-diamond-your-retirement-income-blueprint-review/

“The prolonged deferral of RRSP and other registered money can possibly lead you into a tax trap as you progress into your late 60s and beyond.” Consider taking out additional taxable income even though it is not needed for cash flow and move contributions to a Tax Free Savings Account (TFSA). This strategy is particularly effective before age 65 so you don’t erode any Old Age Security (OAS) benefit."

“I look for ways to help retirees fund their TFSA accounts to the maximum, whether that be through taking CPP early, withdrawing additional amounts out of registered accounts or even moving other non-registered holdings systematically into them.” – Daryl Diamond

For our plan, when we get there, is to keep tax-efficient sources of income until the end. That means the last thing to go is the TFSA. Non-registered investments that can take advantage of the dividend tax credit will go second last.


----------



## BC Eddie (Feb 2, 2014)

My Own Advisor said:


> Here's what retirement guru Daryl Diamond believes:
> http://www.myownadvisor.ca/daryl-diamond-your-retirement-income-blueprint-review/
> 
> “The prolonged deferral of RRSP and other registered money can possibly lead you into a tax trap as you progress into your late 60s and beyond.” Consider taking out additional taxable income even though it is not needed for cash flow and move contributions to a Tax Free Savings Account (TFSA). This strategy is particularly effective before age 65 so you don’t erode any Old Age Security (OAS) benefit."
> ...


Thanks for taking the time to help me out here. Yes, I was aware of Diamond's strategy and intend to at least partially withdraw some RRSP early to take advantage of the early lower tax margin and to avoid OAS clawback later. 

I am in the process of building a spreadsheet (it is now up to 250 columns!!) where I have incorporated most of the CRA tax calculations. My plan is to run through the different permutations of drawing down my 5 different funds sources in different orders. But this is a lot of data entry so I was hoping there might be a simple rule (like spend in the order of descending tax hit (e.g., RRSP first, then eligible dividend income, then other than elig., etc., etc.) But maybe I just have to run through a bunch of scenarios to see if a pattern emerges. I agree with your thinking on the order so will run that early on before I get bored.

Thanks again.


----------



## Eclectic12 (Oct 20, 2010)

Are you delaying the OAS clawback or avoiding it completely?

There is a limit to how much one can put into the TFSA so I expect at some point (unless one has little for income sources), it may be unavoidable. For example, my impression is that CPP at 70 is going to be larger which may mean that this plus investment income plus potential growth in investments/income from RRSP withdrawals add to the challenge.

Then too, don't forget that when the income test are applied for the OAS clawback, eligible dividends will count at something like $1.38 for each $1 dividend income received. Would #4 count in this regard?


Cheers


----------



## Davis (Nov 11, 2014)

BC Eddie said:


> I am in the process of building a spreadsheet (it is now up to 250 columns!!) where I have incorporated most of the CRA tax calculations. My plan is to run through the different permutations of drawing down my 5 different funds sources in different orders. But this is a lot of data entry so I was hoping there might be a simple rule (like spend in the order of descending tax hit (e.g., RRSP first, then eligible dividend income, then other than elig., etc., etc.) But maybe I just have to run through a bunch of scenarios to see if a pattern emerges. I agree with your thinking on the order so will run that early on before I get bored.


BC Eddie, that really is the best solution. I've read differing views on the ordering of draw-downs, and concluded that any rule-of-thumb will likely mislead you. No-one has the same situation as you, and the answer will vary depending on the nature of scale of your assets. 

Building a spreadsheet with nine different accounts and building in a tax calculator is a nightmare, but it will be time very well spent. In addition to letting you run different scenarios, it will allow you to adjust your plan every year as circumstances change. Markets are up? Markets are down? Tax rules change? You change your assets mix? You can easily input those changes as adjust your glide path as needed.

I just put the middle rate tax cut into my worksheet to see the impact, and can now see how much additional security I have. (I had never built in the additional TFSA room we just lost, so losing that doesn't affect my plan.) Best of luck with it.


----------



## Nerd Investor (Nov 3, 2015)

You probably don't want to share this, but it's really going to depend how much you have in some of these buckets, particularly in the RRSP and the corporation. Here are a few thoughts: 

*Corp:* I would at the very least take dividends sufficient to recover the RDTOH in the corporation on an annual basis (let me know if you need an explanation of what that is). 
Considering you have very little in other income, you have a window where you could peel out considerable dividends (are you both shareholders?) from the corporation and pay very little tax. Again, depending on how much is in the corporation, it may be feasible to peel out everything by age 70 without worrying about clawback, and then wind-up the corporation which saves you annual accounting/compliance costs + simplifies your estate. 

Whether you can/should withdraw RRSPs early again, really depends on the amount in there. I've generally found by being wary of tax down the road, people take the Daryl Diamond approach a little too far. There are cases where it makes sense to draw down some of your RRSPs early, but there is always a cost when you are pre-paying tax that could otherwise be growing and compounding for you in a tax shelter.


----------



## OnlyMyOpinion (Sep 1, 2013)

Davis said:


> BC Eddie, that really is the best solution.


^+1. 
If you can assume as a 'worst case' that you won't get any OAS, it will make the task easier. If that assumption finds you running short then include it as well.
We've assumed no OAS.


----------



## BC Eddie (Feb 2, 2014)

Thanks to all of you for providing your comments. They are most appreciated. In case any of you were interested I tried to attach my spreadsheet but it is just too large (200KB) even after being zipped. 

After a lot of spreadsheet revision I have now completed the first three scenarios to see the most tax efficient way of drawing down the following funds: (HISA account, 2 TFSA’s , 2 RRSP’s, Unregistered Investment Portfolio(UIP), Company Proceeds Account(CPA)). 

In all scenarios we are immediately receiving small US and UK pensions and are deferring OAS and CPP to the age of 70. We are also receiving modest interest amounts from the HISA and UIP and modest dividends from the UIP. The minimum RRIF withdrawal amounts were also taken starting at age 72 of the younger spouse. Each year we contributed $5500 to each TFSA. Each year enough money was taken to result in a total, after tax income, of $100,000 starting in 2016. This was increased by inflation each year.

I ran the projections out to age 95 and increased many values every year (e.g. dollar ranges for different tax brackets, OAS claw back limit, OAS/CPP payments, etc. by a percentage equivalent to inflation). Each year, as much as possible, I tried to balance the amount of tax paid by the two spouses by adjusting how much each took from the different income sources. 

At age 80 the house is sold and proceeds are moved to the HISA account. 

At age 95 I paid out the remaining balance of each account and took the appropriate tax. I then calculated the total lifetime after tax value by adding all the annual after tax incomes for all years.

Scenario #1 – Draw down RRSP’s first, next draw down the CPA as shareholder dividends and finally draw money from UIP. The TFSA’s are untouched until the cash out at age 95. This gives the lowest value for the lifetime after tax income. 

Scenario #2 – Draw down HISA account first, next draw down TFSA’s, then RRSP’s, then CPA and finally draw from the HISA again after house sale. This had a 3% improvement over Scenario #1

Scenario #3 – Draw down HISA first, next a combination of TFSA and RRSP withdrawals, then draw down the CPA and finally draw from the HISA again after house sale. This had a 5% improvement over Scenario #1


----------



## t705cda (Dec 15, 2015)

I very much would like to see your spreadsheet because I am in similar circumstances, although about 5-10 years from starting a drawdown. Would you be able to email it?


----------



## BC Eddie (Feb 2, 2014)

t705cda said:


> I very much would like to see your spreadsheet because I am in similar circumstances, although about 5-10 years from starting a drawdown. Would you be able to email it?


Sure - just post your email address.


----------



## t705cda (Dec 15, 2015)

You can send to [email protected].

Much appreciated.

Have you also checked out the calculator here:

http://pabroon.blogspot.ca/2015/05/retirement-planning-and-forecasting-20.html


----------



## Davis (Nov 11, 2014)

Something to keeping mind is that it may be worthwhile drawing from RRSP/RRIF accounts to make sure that each spouse had taxable income at least at the top of the first tax bracket. this would help minimizing lifetime tax. 

Have you applied a discount rate to taxes? Most people would rather pay $1 of tax in 2050 than $1 of tax in 2015. ["I then calculated the total lifetime after tax value by adding all the annual after tax incomes for all years."] Just adding together all of the years may not produce the best result, especially when the dollar that you pay in 2015 will not buy the same pack of gum you're giving up when you get to 2050 when gum will cost $2 (at a constant 2% rate of inflation compounded).


----------



## steve41 (Apr 18, 2009)

Remember, the plan which minimizes the present value of all taxes (including the last) will be the most optimum.


----------



## BC Eddie (Feb 2, 2014)

t705cda said:


> Have you also checked out the calculator here:
> 
> http://pabroon.blogspot.ca/2015/05/retirement-planning-and-forecasting-20.html


No I had not seen this site. If I had I suspect I would not have had to reinvent my own wheel. I will certainly check it out in detail.



Davis said:


> Something to keeping mind is that it may be worthwhile drawing from RRSP/RRIF accounts to make sure that each spouse had taxable income at least at the top of the first tax bracket. this would help minimizing lifetime tax.
> 
> Have you applied a discount rate to taxes? ...).


Yes, I had taken income to the top of the first bracket but, as this was my first cut, I have only been working so far with non-discounted dollars but your point is well taken.



steve41 said:


> Remember, the plan which minimizes the present value of all taxes (including the last) will be the most optimum.


 Agreed - again thanks for the input


----------

