How to make the most of your TFSAs in retirement

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Unlike your Registered Retirement Savings Plan (RRSP), which must start winding down the end of the year you turn 71, you can keep contributing to your tax-free savings account (TFSA) for as long as you live. Even if you make it past age 100, you can keep adding $6,000 (plus any future inflation adjustments) every year. Also unlike RRSPs, contributions to tax-free savings accounts are not calculated based on previous (or current) year’s earned income, says Adrian Mastracci, portfolio manager for Vancouver-based Lycos Asset Management Inc. Any Canadian age 18 or older with a Social Insurance Number (SIN) can contribute to TFSAs. Most near-retirees will have more investible wealth in RRSPs, since they’ve been around since 1957, while TFSAs started much more recently, in 2009. Once you turn 71, there are three options for collapsing an RRSP, although most people think only of the one offering the most continuity with an RRSP: the registered retirement income fund, or RRIF (more on this below). But you can also choose to transfer the RRSP into a registered annuity or take the rarely chosen option of withdrawing the whole RRSP at one fell swoop and paying tax at your top marginal rate. Assuming you’re going the RRIF route, all your RRSP investments can move over to the RRIF intact, while interest, dividends and capital gains generated thereafter will continue to be tax-sheltered. The main difference from an RRSP is that each year you must withdraw a certain percentage of your RRIF and take it into your taxable income, where it will be taxed at your top marginal rate like earned income or interest income. This withdrawal percentage starts at 5.28% the first year and rises steadily, reaching 6.82% at age 80, and ending at 20% at 95 and beyond. Some may be upset they are required to withdraw the money even if it’s not needed to live on. After all, you’re gradually being forced to break into capital, assuming you abide by some version of the 4% Rule (see this article for more information). Before you reach RRIF age, Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial, suggests those in their 60s consider early RRSP withdrawals if their post-employment income is lower than it will be once RRIF payments must begin. This confers a twin advantage of being taxed at your lower rate today while also reducing minimum withdrawals that will be later taxed at a higher rate. Married couples with RRIFs of different sizes should draw down on the larger RRIF first if the annuitant is 65 or older. RRIF income is considered eligible pension income for pension splitting. and Ardrey says a withdrawal in one spouse’s name may be split on the tax returns of both spouses, potentially reducing total taxes owing and increasing the net payment received. For 2020 only, one measure introduced to cushion seniors from the COVID crisis was a one-time option to withdraw 25% less than normal from a RRIF—so if you turned 72 in 2020, you can opt to withdraw 4.05% instead of 5.4%. RRIF owners with a younger spouse can base minimums on their age and also elect the 25% one-time reduction. Where both have RRIFs, both can take the 25% one-time reduction in 2020. So, how do TFSAs come into this? While you can’t avoid encroaching on your RRSP-turned-RRIF, there’s no rule that once having withdrawn the money and paid tax on it, you are obliged to spend it. If you can get by on pensions and other income sources, you are free to take the after-tax RRIF income and add it to your TFSA, ideally to the full extent of the annual $6,000 contribution limit. Unlike your RRSP-turned-RRIF, on which Ottawa ultimately has dibs, that $6,000 in the TFSA is yours free and clear. When you need to tap it for spending, there’s no tax; or you can just let the nest egg compound tax-free. As of 2020, the cumulative TFSA contribution room is $69,500, to which you can add $6,000 as of Jan. 1, 2021 (which falls on a Friday). That means effective in the new year, someone who never before contributed could make a total contribution of $75,500. Another plus for TFSAs is that income from them doesn’t affect income-tested benefits like Old Age Security (OAs) which, in 2020, is clawed back by 15 cents for every dollar beyond the current $79,054 threshold. For lower-income retirees who rely on the Guaranteed Income Supplement (GIS), the TFSA’s tax-free status is doubly important because of the much lower GIS clawback thresholds. Ardrey says retirees have little need or opportunity to add to RRSPs. Even if they still have RRSP contribution room, there’s little value in contributing if their income is lower now than it will be when they receive RRIF payments. That leaves the “TFSA as the only viable registered investment account for new savings for those in or approaching their retirement years,” Ardrey says. If you have a dollar to save, you are better off using the TFSA if your tax bracket is higher when you withdraw that dollar than it is now, Ardrey says. “With forced RRIF minimum withdrawals, this is very much the case for many in retirement, thus making the TFSA the savings vehicle of choice for those in this stage of life.” Mastracci says the TFSA “has a great fit with the RRSP/RRIF, complementing one another throughout your investing marathon.” He has two different TFSA game plans for clients: one for those aged 30 to 60, and another those 60 plus. For younger people, the TFSA may be their only investment plan while, for the older cohort TFSAs must be integrated with a total plan that includes pensions, annuities, non-registered savings, RRSPs and RRIFs. Asset mix has the biggest potential impact. Younger folk can be aggressive with 80% equities in their TFSAs, while Mastracci prefers a more balanced 50-50 mix of stocks and fixed income for retirees. He assumes the latter have a time horizon of 10 years or more, and that least one spouse reaches 95. While young people need to be careful about cashing out of TFSAs prematurely, seniors must be most careful about designating beneficiaries. MoneySense Investing Editor at Large Jonathan Chevreau is also founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected]

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About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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Comments Cancel reply

Leon Junior says:

December 18, 2020 at 7:00 am

What if your current tax bracket is higher than it is going to be later? In that case RRSP makes more sense. Why should I go for TFSA if I have RRSP room available? Going the RRSP way will save me taxes now and then later in life. Also, with RRSP I can day trade or do short duration trades whereas with TFSA I cannot as they are considered “business income” if I do.

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1. MoneySense Editors says:
  
  December 22, 2020 at 2:03 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Philip Lucas says:

December 21, 2020 at 12:49 pm

I would like to read strategies on families with RRIF Investments as the couple get older and one passes away. So Estate planning for the survivor.

For example: When the elder spouse passes away leaving a younger spouse with a considerable RRIF that they have to keep taking an income rom even if they still work. Is there a way to carry the RRIF transfer tax exemption a step further if they remarry and name their new spouse as beneficiary? Can the new spouse receive the RRIF income when the elder spouse dies? Can the income from the RRIF investment be reduced to account for the age of the possibly younger new spouse?

Are TSFAs transferable in kind to a spouse, i.e. into their TSFA account rather than just as unsheltered investment funds?

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1. MoneySense Editors says:
  
  December 22, 2020 at 1:59 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Mavis Walmsley says:

December 21, 2020 at 2:30 pm

Thank you for the interesting article. My husband will turn 71 in 2021 and I will turn 65. How or who do we notify that we want to use my age when he turns his RRSPs to RRIFs? We would prefer to withdraw less from the RRIF, based on my age not his.

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1. MoneySense Editors says:
  
  December 22, 2020 at 1:59 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Anne Bossy says:

December 21, 2020 at 7:42 pm

Thank-you for this article. My husband and I are experienced real estate investors, but are now unable to qualify for a residential mortgage as we are recently retired. We’re not interested in commercial multi-family mortgage investments at this time, so are thinking about cashing in some of our RRSP’s to continue to purchase properties. We figure we’ll be taxed at age 71 through RRIF’s anyway, at the same tax bracket we’re in now, so why not use the money for better investments than we’ll get through financing mutual funds or the stock market? Having said all that, this would still be a scary move for us, so any feedback would be greatly appreciated!

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1. MoneySense Editors says:
  
  December 22, 2020 at 1:59 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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stavros klironomos says:

March 20, 2021 at 8:17 pm

March 20-2021
To Mavis Walmsley,

Talk to your Institution where you have your RRSP they will Gide you, there is a form that you fill out, as well I would suggest, you and your husband, make each other successor no Beneficiaries, I am NOT an ADVISOR just person who did just that, with my wife been 12 younger than I am, it works fine for us, Talk to your Bank,
S.K.

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