Which Retirement Account to Draw Down First

A household reaches the end of working life holding money in several places at once: an account with no tax shelter at all, a tax free savings account, a registered plan that has never been taxed, and for some, a corporation with retained earnings sitting in it. The question of which pool to spend first looks like housekeeping. It is not. Across a retirement of twenty five or thirty years, the order in which those pools are emptied changes the lifetime tax bill, changes how much Old Age Security survives the recovery tax, decides whether the Guaranteed Income Supplement is available at all, and changes what is left for the people named in the will. It is among the largest financial decisions a Canadian household makes after the decision to buy a home, and it is made most often by accident. This article sets out how the order actually works, why the intuitive answer is usually the wrong one, and why the honest answer is a projection rather than a rule.

Why the intuitive order usually fails

The intuitive order is easy to state. Spend the non registered account first, because that money has already been taxed. Leave the registered plan alone as long as the law allows, because it compounds without tax inside. Keep the tax free savings account untouched to the end, because it is the cheapest money in the household to hold. Every one of those three steps is defensible on its own. Taken together, across a retirement that runs thirty years, they produce a particular and expensive shape.

The shape is this. Taxable income is low in the early retirement years while the non registered account is being spent down. It jumps when the registered plan has to start paying out. It stays high for the rest of life, because the required payment is calculated on a balance that was allowed to grow untouched for a decade. Then one enormous taxable amount arrives in the year of the second death. Canadian tax is graduated, so income that arrives unevenly costs more than the same income arriving evenly.

Levelling the lifetime taxable income

The correction is unintuitive and most people resist it at first. It usually means taking money out of the registered plan before anything requires it, in the years when other income is low, and deliberately paying tax earlier than necessary in order to pay less of it in total. Nobody enjoys volunteering for a tax bill. The arithmetic does not care.

The reason is the graduated rate structure. A dollar taken out of a registered plan in a year with little other income is taxed in a low bracket. The same dollar, left to compound and taken out later alongside a required minimum payment and two public pensions, is taxed in a higher one. Deferral only pays when the rate later is lower than the rate now, and for a household with a large registered balance and modest income in early retirement, it very often is not.

There is a second effect that gets missed. Every dollar taken out early is a dollar that is not left in the plan compounding into a larger mandatory withdrawal later. The required payment is calculated on the value at the start of each year, so reducing the balance reduces every future required payment, and the saving compounds in the household’s favour rather than against it. See how the minimum is calculated.

One further piece of the Act rewards moving early. Once the holder has attained 65 years of age, a payment out of a registered retirement income fund is pension income under subsection 118(7) of the Income Tax Act. That makes it eligible for the pension credit in subsection 118(3) and splittable with a spouse or common law partner by joint election under section 60.03. Converting part of a registered plan to a fund at 65 rather than waiting for the deadline can therefore open both a credit and a splitting election several years early. Source: Income Tax Act, Justice Laws Website, read 7 September 2026. See also income splitting.

The recovery tax as a constraint, not a tax rate

Part I.2 of the Income Tax Act imposes a tax on Old Age Security benefits. Section 180.2 computes it on adjusted income above a base amount, recovering a fraction of the excess, and above a higher level the pension is gone entirely. The base amount is adjusted each year under section 117.1, so this article does not print it. Service Canada publishes the current figures and they are the ones that apply. Source: Income Tax Act, Justice Laws Website, read 7 September 2026. Our page on the recovery tax sets out the mechanics.

What matters for drawdown is the measure being used. It is adjusted income under section 180.2, not taxable income after every deduction, and it counts the grossed up amount of Canadian dividends rather than the cash actually received. A retiree living on eligible dividends from a non registered portfolio can be pushed into the recovery by an amount of income that never reached the household in cash at all. That is one of the more surprising results in Canadian retirement taxation and it catches people every year.

It also means the constraint is about shape rather than level. A household whose income sits just under the base amount for twenty years keeps the whole pension. The same household with the same lifetime income arriving in a lumpier pattern loses part of the pension in the high years and gets nothing back in the low ones. There is no averaging and no carry forward. That asymmetry is precisely the argument for levelling income deliberately.

Where the supplement applies, the order inverts

The Guaranteed Income Supplement changes the answer completely for the households it touches, and it is the reason no single rule can be given. Under section 12 of the Old Age Security Act the supplement is payable to a pensioner and is reduced by one dollar for each full two dollars of the pensioner’s monthly base income. Source: Old Age Security Act, Justice Laws Website, read 7 September 2026. The site page on the supplement covers eligibility.

That reduction is not a tax, but it behaves like one, and it stacks on top of the ordinary income tax payable on the same dollar. For a low income retiree the combined effect of taking one more dollar out of a registered plan can exceed the marginal cost borne by the highest income earners in the country. The general advice to draw registered money early is not merely imperfect for these households; it is sharply and expensively wrong in the supplement years.

What counts as income is defined in section 2 of the Old Age Security Act. It is income computed under the Income Tax Act with the deductions that section lists, and benefits under the Old Age Security Act itself are excluded so the calculation does not chase its own tail. Registered withdrawals count in full. Tax free savings account withdrawals do not count, because they never enter income under the Income Tax Act in the first place.

So for these households the order inverts. Registered money is drawn down hard and early, ideally in the years before the pension and the supplement begin, and the tax free account carries the years when the supplement is in play. Getting this backwards is among the costliest errors in Canadian retirement planning, and it is made most often by households with modest savings who can least afford to make it.

The tax free account is the last resort

The instinct to spend the tax free savings account first is understandable. The withdrawal is not taxed, so it feels free. It is not free. It is the most useful dollar the household owns, and the usefulness lies in what it does for every other dollar rather than in the withdrawal itself.

Money inside the account compounds without tax and comes out without entering income. It therefore has no effect on the recovery tax, no effect on the supplement, no effect on age related credits, and no effect on provincial programs that test income. It is the one pool that can fund a spike year, a new roof, a vehicle, a medical cost incurred abroad, without pushing the household into a higher bracket or costing it a benefit it would otherwise have kept.

Withdrawal room is restored the following calendar year, which makes the account the household’s shock absorber as well as its tax shelter. And unlike a registered plan, nothing about it produces an income inclusion on the final return. Two of its three advantages have nothing to do with the tax on the growth. Our overview of registered accounts covers the rules, and which to fill first covers the accumulation side of the same question.

An incorporated owner has a fourth pool

An owner with a corporation has a fourth pool and a second set of levers. Retained earnings are not the owner’s money until they are paid out, and how they come out, as salary or as a taxable dividend, interacts with everything above. This is the point at which a general article stops being sufficient and a projection becomes necessary.

Salary is deductible to the corporation, taxable to the recipient, and creates earned income. Earned income is what produces registered plan contribution room under the definition in subsection 146(1) of the Income Tax Act, and taxable dividends do not qualify. Salary also requires contributions to the public pension plan, which is a cost in the year and a benefit later, and the balance between those two depends heavily on the owner’s age when the question is asked. See when to start the public pension.

Dividends carry a gross up, and it is the grossed up figure that enters adjusted income for the recovery tax. An owner drawing dividends can therefore lose part of the pension on income that is larger on the return than in the hand. Where both spouses hold shares the arithmetic changes again, and it changes in a direction that has to be modelled rather than assumed.

The corporation carries a constraint of its own. Under subsection 125(5.1) of the Income Tax Act the business limit is reduced by reference to adjusted aggregate investment income of the corporation and its associated corporations for taxation years ending in the preceding calendar year. Investment income piling up inside the company can therefore raise the tax on active business income in the following year. Source: Income Tax Act, Justice Laws Website, read 7 September 2026.

The practical consequence is that the corporate pool is often drawn earlier than instinct suggests, in measured amounts across many years, rather than left to accumulate and then distributed in a rush by an estate. Where a policy is part of the structure, the capital dividend account is part of the same conversation, and corporate owned coverage sets out how the ownership is arranged.

What a large registered balance costs at death

Dying with a large registered balance is an expensive way to leave money behind. Under subsection 146(8.8) of the Income Tax Act the annuitant of a registered retirement savings plan is deemed to have received, immediately before death, a benefit equal to the fair market value of the property of the plan, subject to the exceptions the subsection sets out. Subsection 146.3(6) does the same for the last annuitant of a registered retirement income fund. Source: Income Tax Act, Justice Laws Website, read 7 September 2026.

A transfer to a surviving spouse or common law partner defers the inclusion, which is why the problem does not appear on the first death and arrives in full on the second. One return, one taxation year, the entire remaining balance, at whatever rates the province applies to a very large amount of income in a single year. Our page on registered plans at death works through the mechanics.

Compare that with the other pools. Non registered property is subject to a deemed disposition, so only the accrued gain is brought into income, not the whole value. A tax free savings account passes with no income inclusion at all. The same estate value produces a materially different tax bill depending on which account it happened to be sitting in. See the deemed disposition.

The cases that reverse the answer

Where lifetime income will always sit in the lowest brackets and the supplement is genuinely in range, registered money comes out first and it comes out hard, in the years before the public pensions begin. That is the clearest reversal of the general case, and it applies to a great many households.

Where income is high and will stay high, and the registered balance is modest relative to an employer pension already in payment, deferral does win and the intuitive order is close to right. The general case is a tendency, not a law. Households with a defined benefit entitlement should read the pension decision first, because it changes every number downstream of it.

Where money is held in a locked in account the province’s pension legislation constrains both the minimum and the maximum, and the drawdown order has to be built around that constraint rather than through it. See locked in accounts.

Why the answer is a projection, not a rule

Each element above is a rule and each is simple enough on its own. The interaction of them is arithmetic, and it is arithmetic no rule of thumb can carry. The inputs are the size of every pool, the ages of both spouses, the start dates chosen for the public pensions, whether the supplement is in range, the province of residence, the corporation if there is one, and an assumed horizon for each person.

The output is not a slogan. It is a year by year schedule: this much from the registered plan this year, this much from the non registered account, this much left alone, with the tax computed for each year rather than assumed. The schedule is then re run whenever a real number moves. Our income gap calculator is a starting point for the size of the problem, not a substitute for the schedule.

It also needs review. Legislation changes, thresholds are indexed every year, and household circumstances change more often than plans do. This is work to do with a qualified tax professional against the household’s own figures. Where insurance forms part of the structure, a Financial Security Advisor is part of the same conversation, and where the estate has liabilities to settle, estate liquidity belongs in the same model.

Frequently Asked Questions

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Start with registered or non registered and where each asset should be held, because the drawdown order is easier when the accumulation was arranged properly. The recovery tax is the constraint that binds most often, and how investment income is taxed explains why a dollar of dividend and a dollar of interest are not the same dollar. Owners of a company should read the incorporated owner’s view alongside it.