Traditional Plan
Deposit Order
(drag to reorder)
TFSA
RRSP
Joint Non-Registered Account
Non-Registered Account
Withdrawal Order
(drag to reorder)
Non-Registered Account
Joint Non-Registered Account
RRSP/RRIF
TFSA
The Traditional or 'Rule of Thumb' Approach
The Traditional or "Rule of Thumb" approach is a widely used, conventional strategy followed by many big banks and financial planners. It applies a generalized, one-size-fits-all method for managing contributions to and withdrawals from various types of investment accounts, without tailoring the strategy to an individual's unique circumstances like tax situation, goals, or specific assets.
Here's the typical deposit order used in this traditional method:
1
First Home Savings Account (FHSA) – If available, contributing to this is prioritized due to its tax advantages for first-time homebuyers.
2
Tax-Free Savings Account (TFSA) – Next, contributions go to the TFSA, which allows for tax-free growth and withdrawals.
3
Registered Retirement Savings Plan (RRSP) – Contributions here reduce taxable income and grow tax-deferred until withdrawn.
4
Non-Registered Accounts – Contributions to non-registered investment accounts come last, as these accounts are subject to tax on income and gains.
When it comes time to access your funds, typically the withdrawal / liquidation order is also set:
1
Non-Registered Accounts – These are liquidated first to minimize taxable income in the short term.
2
CCPC Investment Funds – If the user has a Canadian Controlled Private Corporation (CCPC), its investment funds are drawn next.
3
Locked-In Retirement Accounts (LIRA) – These are accessed once non-registered and CCPC funds are exhausted.
4
Registered Retirement Savings Plan (RRSP) – RRSP withdrawals happen later in retirement, as they are fully taxable.
5
Tax-Free Savings Account (TFSA) – The TFSA is the last to be accessed, preserving its tax-free withdrawals as long as possible.
Why It's Suboptimal
While straightforward, this Rule of Thumb method doesn't account for individual factors like varying tax brackets, lifestyle preferences, or changing financial goals. It may lead to higher taxes over a lifetime or missed growth opportunities, as it does not optimize the timing or sequence of withdrawals and contributions based on each user's situation.
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