What’s the best order for drawing your retirement income?
If you’re a doctor getting close to retirement, we can help you plan for a smooth financial transition when you stop earning income from your practice.
The financial transition into retirement can be complicated for an incorporated physician with corporate assets. Every planned source of income has distinct tax implications which change as you draw on it earlier or later in retirement — or leave it to your estate.
Consider these five relatively common components:
- Corporate investments
- Non-registered accounts
- Tax-free savings account (TFSA)
- Canada Pension Plan/Quebec Pension Plan (CPP/QPP)
- Registered retirement savings plan/registered retirement income fund (RRSP/RRIF)
What to spend first, and what to save as long as you can? It all depends on your primary objective once retired.
What are your priorities?
- Manage risk: “I’d like to count on guaranteed income, as much as possible, for security.”
- Minimize tax upfront: “I’d like to pay as little tax as possible in my first years of retirement.”
- Grow net worth: “I’d like to hold off on using savings, to keep them growing for later.”
- Preserve estate: “I want to leave as much behind as I can for my beneficiaries.”
Manage risk: draw from your most aggressive investments first.
Minimize tax upfront: draw from less-taxed assets first.
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Withdraw first
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TFSA |
TFSA withdrawals are tax-free. |
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Withdraw last
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RRSP/RRIF |
Income from your RRSP/RRIF is fully taxable. Reserve this for as long as you can, but remember that you must start drawing from your RRIF after the end of the year in which you turn 71! |
Watch out: For a TFSA, there are some challenges if you’re considered a U.S. person for tax purposes. Learn how to avoid these costly TFSA mistakes.
Grow your net worth: draw from non-investment sources to let your portfolio grow
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Withdraw first
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CPP/QPP |
You can start taking CPP/QPP retirement benefits as early as age 60 (though your lifetime benefit will be smaller). Start drawing this before other income sources if you want to grow your net worth. |
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Withdraw last
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TFSA |
Aim to draw from your TFSA later in your retirement to allow it to maximize its growth. It’s the only option with no future tax implications! |
Preserve your estate: minimize estate taxes and leave more to your beneficiaries
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Withdraw first
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RRSP / RRIF |
Money left in an RRSP/RRIF at death is usually fully taxable in an estate. It makes sense to use this yourself first to reduce the potential tax burden on beneficiaries. |
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Withdraw last
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TFSA |
Draw this last since savings in a TFSA can continue to grow with no future tax implication to you or your estate! |
Contact your MD Advisor* to learn more about retiring as an incorporated physician. We’re here to guide you as you explore various scenarios, to offer the financial tools you need for your situation and to help you increase your financial security.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.