The XEQT Withdrawal Strategy in Retirement

Why Withdrawal Order Matters So Much

In retirement, you likely have XEQT (or the cash equivalent) in multiple accounts: a TFSA, an RRSP (soon to become a RRIF), and possibly a non-registered account. Each account has a different tax treatment when you make withdrawals. The goal of withdrawal sequencing is to minimise the total tax you pay over the rest of your life, not just in any single year.

The core principle: higher-bracket withdrawals are more expensive than lower-bracket withdrawals. TFSA withdrawals are free. RRSP/RRIF withdrawals are fully taxable as income. Capital gains from non-registered XEQT are 50% taxable. Managing which bucket you draw from, and when, determines which tax bracket each dollar of withdrawal hits.

The Three Account Buckets and Their Tax Treatment

TFSA: Withdrawals are completely tax-free. No impact on income-tested benefits like OAS, GIS, or the Age Amount. TFSA withdrawals do not appear on your tax return at all. The withdrawn amount is added back as contribution room on January 1 of the following year.

RRSP/RRIF: Every dollar withdrawn is fully taxable as ordinary income in the year of withdrawal. There is no capital gains treatment, no dividend tax credit, and no partial inclusion rate. This is the most tax-expensive bucket to draw from at higher income levels. RRSP withdrawals become mandatory minimum withdrawals from a RRIF starting the year after you convert (which must occur by December 31 of the year you turn 71). The minimum withdrawal percentage rises each year, peaking at 20% at age 95+.

Non-registered: Withdrawals of the principal (your original contributions) are tax-free. Capital gains from appreciation are taxed at 50% inclusion. Dividend income received annually is taxed as it arrives (eligible dividends get the tax credit; foreign income is fully taxable). Interest income is fully taxable. XEQT in a non-registered account is more tax-efficient than bonds or GICs in the same account because most of its return is capital appreciation rather than fully taxable income.

The General Withdrawal Framework

The framework most widely supported by Canadian financial planners is:

1. Draw from non-registered first in retirement, up to the point where your marginal rate is acceptable. Capital gains at 50% inclusion are less expensive than RRSP withdrawals at 100% inclusion. Depleting non-registered holdings first also reduces the future capital gains tax liability in your estate.
2. Draw RRSP/RRIF to fill lower tax brackets. In years where your CPP, OAS, and other income leave room in the lower brackets before OAS clawback kicks in, take RRIF withdrawals above the mandatory minimum to fill that room at a lower marginal rate.
3. Preserve TFSA for last as a tax-free buffer. TFSA funds can cover unexpected expenses, large one-time withdrawals, or supplemental income in high-income years without affecting income-tested benefits.

The OAS Clawback and How to Avoid It

The Old Age Security clawback begins when your net income exceeds $90,997 in 2025, rising to approximately $95,323 in 2026. For every dollar of net income above this threshold, 15 cents of OAS is clawed back. OAS is completely eliminated once income reaches approximately $148,000 to $153,000, depending on age.

RRIF minimum withdrawals, CPP, and other income can push retirees above the clawback threshold without careful planning. The strategies to manage this include:

• Drawing down RRSP balances strategically between ages 65 and 71, before mandatory RRIF minimums compound the problem.
• Using pension income splitting to shift up to 50% of RRIF income to a lower-earning spouse, reducing individual net income below the clawback threshold.
• Using TFSA withdrawals in high-income years instead of RRIF withdrawals, since TFSA income does not appear on the return and does not affect OAS eligibility.
• Deferring large capital gain realisations from non-registered XEQT to years when RRIF withdrawals are lower.

For a detailed look at how pension income splitting integrates with this framework, see our companion article on XEQT and the pension income splitting strategy.

Strategic RRSP Meltdown Before Age 71

One of the most powerful and underused strategies for XEQT investors approaching retirement is the intentional drawdown of RRSP funds between age 60 and 71, before CPP and OAS are both flowing. The logic: in the years between full retirement and age 65 to 70, many Canadians have lower income than they will have once CPP and OAS begin. Those lower-income years are an opportunity to withdraw from the RRSP at a lower marginal rate, potentially the 20% to 30% range, rather than the 40% to 50%+ rate that might apply once CPP, OAS, and mandatory RRIF minimums all run simultaneously.

For XEQT holders with large RRSP balances, this strategy can save tens of thousands of dollars. The withdrawn funds can be re-invested in TFSA accounts (if room exists) or non-registered accounts in XEQT, shifting the investment from a fully-taxable bucket to a tax-free or partially-taxable one.

Using Your TFSA as a Tax Buffer

The TFSA is uniquely valuable in retirement not just for its tax-free growth but for its flexibility. Unlike RRIF withdrawals, TFSA withdrawals do not create taxable income and therefore do not trigger OAS clawbacks, reduce the Age Amount credit, or affect means-tested government benefits. This makes the TFSA a precise tool for managing retirement income in any given year.

The optimal use: maintain XEQT in your TFSA throughout retirement. In years when your RRIF minimum pushes you toward the OAS clawback threshold, supplement income with TFSA withdrawals rather than additional RRIF withdrawals. This keeps your income on the right side of the clawback line while still providing the cash flow you need.

Sequencing by Retirement Scenario

XEQT-Specific Considerations in Drawdown

Selling XEQT to fund withdrawals in retirement generates capital gains only if the sale price exceeds your ACB. Track your ACB carefully across all non-registered XEQT holdings. Partial sales are taxed on the per-unit gain above ACB, so spreading large dispositions across multiple tax years manages the bracket impact.

XEQT held in a RRIF does not generate capital gains when sold inside the account. The full proceeds of any RRIF withdrawal (including XEQT units sold to fund it) are included in income at 100%, not at the 50% capital gains rate. This is one reason RRIF balances are the most expensive bucket to draw from at high income levels.

For the mechanics of converting your RRSP to a RRIF while holding XEQT, see our companion article: RRSP to RRIF Conversion and What It Means for XEQT Holders.