A Registered Retirement Savings Plan (RRSP) balance can look comfortably large until you need to spend it. The amount on the account statement generally includes money that will eventually go toward income tax.
The useful time to account for that is before withdrawals begin. It changes how much you need to take out, how much remains invested, and whether a large one-time expense creates an unnecessarily large tax bill. So here’s how I’d start.
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Getting started
For Canadian residents outside Quebec, ordinary RRSP withdrawals generally face withholding of 10% on amounts up to $5,000, 20% above $5,000 through $15,000, and 30% above $15,000. Quebec has different federal withholding and additional provincial rules.
That said, suppose an Ontario resident withdraws $10,000. The institution withholds $2,000, leaving $8,000 deposited. If the ultimate tax on that withdrawal is 30%, the total tax is $3,000, leaving another $1,000 to settle.
If the person actually needs $10,000 after tax and the same assumed 30% rate applies throughout, the required gross withdrawal is about $14,286. That’s a materially different spending decision from withdrawing $10,000 and assuming the account balance equals usable cash.
SLF
Sun Life Financial (TSX: SLF) can produce dividend income within a retirement portfolio. Its insurance, health-benefits, wealth, and asset-management businesses offer several earnings sources, including growth outside Canada. The company reported second-quarter underlying earnings of $2.02 per share. Its $0.96 quarterly dividend used about 48% of that adjusted operating amount. That provides an earnings cushion, with insurance claims and investment markets still affecting the outlook.
At the recent price of $109.82, a $25,000 budget bought 227 shares for $24,929.14. The annualized $3.84 dividend generated $871.68 at an unchanged payment, a yield of about 3.5%.
Inside a Registered Retirement Savings Plan (RRSP), the dividend can be reinvested without immediate Canadian income tax. When money is later withdrawn normally, it’s generally taxed as RRSP income. It doesn’t retain the favourable eligible-dividend treatment it might receive in a taxable account. That makes dividend income useful for building the account while still requiring a separate spending calculation.
Considerations
Sun Life’s quoted price was about 13.6 times times earnings. The stock still faces changing claims costs and client investment flows. A large RRSP withdrawal during a price decline can force the sale of more shares than expected. Cash and suitable fixed-income holdings can cover near-term withdrawals while equities serve the longer period.
An eligible Tax-Free Savings Account (TFSA) offers another source for irregular expenses because withdrawals generally don’t add Canadian taxable income. That flexibility can help avoid adding a large RRSP withdrawal to an already high-income year.
Future government benefits deserve attention too. Taxable RRSP income can affect income-tested benefits, whereas eligible TFSA withdrawals generally don’t. The full after-tax plan matters more than the biggest account statement.
Large withdrawals can also change income-tested credits and benefits, so the cost may extend beyond the assumed tax bracket. Keeping tax-free savings available alongside an RRSP gives the household more ways to fund an expense without making one year’s taxable income unnecessarily large.
Bottom line
A $10,000 RRSP balance isn’t automatically $10,000 to spend. Under the example’s 30% tax rate, a $10,000 expense requires about $14,286 withdrawn. Sun Life can help build retirement income, but taxes and the timing of withdrawals determine what reaches the household budget. Planning that early makes the portfolio more useful when retirement arrives.
