What Should You Cash In First When You Retire?

The best way to answer this question is to first simulate your cashflow and changes in income and expenses during retirement. Then, take your results to a financial planner, who can check them using software that is more sophisticated than that usually available to non-specialists.

Here are some general recommendations: 

Supplemental Pension Plans (SPPs)

When you retire, you can choose to receive your pension immediately or wait and take a deferred pension at the normal age of retirement. Your choice should be based on whether any reductions apply to your pension, and how much.

• If you're eligible for a pension with no reduction, don't think twice—take your pension immediately.
• If the penalty for taking an early pension is less than 6% a year, it's often better to take your pension immediately.
• If your pension is subject to an actuarial adjustment or reduction of 6% a year, the 2 options are about the same.

Other factors should also be considered, such as whether a deferred pension would be indexed between now and your first payment.

Québec Pension Plan

If you've contributed to the Québec Pension Plan (QPP), you can apply for a pension at age 60. You can also share it with your spouse to reduce your tax bill, either when you apply or at a later date. Some restrictions apply.

A retiree who has enough income can delay applying for his or her QPP pension, which will be increased by one-half percent a month for each month of delay after the retiree turns 65, up to a maximum of 30%.

Talk to your financial advisor to compare the advantages of retiring before, at, or after age 60.

Old Age Security

The Old Age Security (OAS) pension is payable at 65. Be sure to apply for yours 6 months before you turn 65, since there's no advantage to putting it off. Even if you will have to repay all of your benefits because your income level is high, applying on time will prevent administrative problems when you file your taxes. You'll have a statement indicating the amount withheld at source and the corresponding amount paid out.

Unregistered Savings

The income these investments generate must be declared annually, which means you can't usually defer your taxes. When you make withdrawals, the money is nontaxable (unless the market value is higher than the purchase price). If you need to supplement your retirement income to cover your basic expenses, you should start with your unregistered savings.

Tax-Free Savings Accounts 

Withdrawals from a tax-free savings account (TFSA) are not taxable. Once you have used up your unregistered savings, you should consider making withdrawals from your TFSA, which will create new contribution room that you can use in the future. This strategy is particularly advantageous when it allows you to avoid repaying your Guaranteed Income Supplement (GIS) and OAS benefits.

Other Sources of Income

Additional income sources include registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), locked-in retirement accounts (LIRAs), life income funds (LIFs or RLIFs) and deferred profit sharing plans (DPSPs). These plans provide a tax deferral, since they're made up of untaxed salary and returns on investments. You shouldn't be in a rush to end the deferral. However, you must convert your RRSPs into RRIFs and withdraw a minimum amount by the time you turn 71.

While the general rule is to withdraw unregistered savings first, it may be better to use your registered savings vehicles in some situations. The classic example is if your income in a given year is so low that the marginal tax rate is low or zero, in which case it's better to withdraw registered savings, but only if you need the extra funds.

Since your life income fund is subject to withdrawal restrictions (a ceiling), make the maximum withdrawal from your LIF or RLIF before dipping into your other registered plans.

With any of these plans, you should, of course, use income splitting to best advantage and withdraw from the account of the spouse with the lowest taxable income for the year. This is only possible if you and your spouse have a combined financial strategy.

In some situations—for example, if you may be eligible for the GIS—it may even be a good idea to cash in some or most of your registered funds so your GIS isn't reduced as much in subsequent years. Withdrawing from your TFSA is the best choice in these situations because the amounts withdrawn do not effect social or tax programs. Before choosing this strategy, find out if it's to your economic advantage, and talk to a financial planner if necessary.

Lastly, a modest $2,000 withdrawal from your RRIF beginning at 65 will make you eligible for a federal tax credit for pension income if you don't have an SPP.

Following the Right Order Really Pays Off!

The order in which you make your withdrawals is important. A comprehensive financial plan will help you optimize the use of your savings. Ask a specialist for advice if needed. The time you spend will be a good investment.