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In most cases, TFSAs make more sense than RRSPs for retirees
Q. I am 67-years-old and retired with unused RRSP contribution room of $30,000. Do I need to have earned income in retirement to make and deduct an RRSP contribution? And if so, what is considered earned income? Alternatively, would I just be better off putting the same amount of money in a TFSA—I have room there as well.
—Clarence D.
A. Clarence, the phrase “earned income” includes employment, rental or business income, but excludes investment income and most pension income. That said, it isn’t actually relevant to your question, explains Rona Birenbaum, a CFP with Caring For Clients. “Earned income is needed to generate RRSP contribution room. But it is not necessary to benefit from an RRSP deduction since the deduction is taken against all income.” You have $30,000 in contribution room available to you, and you’re able to use that regardless of your earned income.
You can contribute to an RRSP right through to the year in which you turn 71 years old. But as you say, you need to figure out if the TFSA might actually be a better option. Birenbaum offers this advice: “If your retirement income is high now and expected to be lower when you convert your RRSP to a RRIF and begin withdrawals, the contribution to the RRSP could make sense. Otherwise, it’s TFSA all the way.”
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