Using Tax Free Savings Accounts In Retirement

Tax Free Savings Accounts are excellent savings vehicles for Canadians.  They can be used for short term savings goals, or as part of a longer term retirement strategy.

Canadians start building contribution room in their Tax Free Savings Accounts once they turn 18.  Money can be withdrawn from a TFSA at any time, with no tax consequences.  Any amount you withdraw is added back to your contribution limit for the following year.

While young Canadians are looking for ways to save inside their TFSA, older Canadians must consider strategies for using Tax Free Savings Accounts in retirement.  Here are three approaches to consider:

Supplementing Income

Canadians can use their TFSA to supplement income in retirement.  Since TFSA withdrawals aren’t considered as income, they don’t affect your eligibility for programs like the Guaranteed Income Supplement and Age Tax Credit, and don’t result in Old Age Security claw-backs.

One of the challenges of living on a fixed income is that expenses aren’t always fixed from year-to-year.  Seniors can withdraw from their Tax Free Savings Accounts and use the money for replacing a vehicle, home renovations, or to take a dream vacation without tapping into their fixed monthly income.

Continue Saving

Unlike RRSPs, which must be converted to a RRIF or annuity by December 31^st in the year you turn 71, there is no maximum age for holding a TFSA.  Canadians can use their Tax Free Savings Accounts as a tax shelter and keep contributing until the day they die.

Canadians with multiple sources of income, like an employer pension, often complain that the forced withdrawals from their RRIF put them in a position of taking out more money than they need, which pushes them into a higher tax bracket.

Tax Free Savings Accounts won’t help with the immediate tax burden, but contributions in retirement can provide a tax shelter for future investment income.

Estate Planning

Unless left to a surviving spouse, any registered retirement plans that you own will be terminated when you die, and all the money in these accounts is treated as personal income on your final tax return.

Successor Holder:

Tax Free Savings Accounts are not subject to taxes upon death, and should be used as a valuable estate planning tool.  Provided that you’ve named your survivor as the TFSA successor holder, the account will continue to exist.

The successor holder assumes ownership of the TFSA, and both its value at the date of the original holder’s death and any income earned after that date will continue to be sheltered from tax.

The successor holder can make tax-free withdrawals from this account.  They can also make new contributions to the account, subject to their own unused TFSA contribution room.

Designated Beneficiary:

If your spouse is named the TFSA successor holder, consider naming your children as designated beneficiaries.

A designated beneficiary will not have to pay tax on payments made out of the TFSA.  Beneficiaries (other than a survivor) can contribute any of the amounts they receive to their own TFSA as long as they have unused TFSA contribution room available.

Final Thoughts

Before the TFSA was introduced in 2009, there were no effective strategies for Canadians to shelter investment income after age 71.  Fortunately there are plenty of options for using Tax Free Savings Accounts in retirement.

Tax Free Savings Accounts give seniors the flexibility to withdraw tax-free money to supplement their fixed retirement income, without affecting eligibility for government programs.

There is no maximum age for making contributions to your TFSA, allowing seniors to continue to save money in retirement.

Finally, seniors can use Tax Free Savings Accounts as an estate planning tool by building a tax-sheltered inheritance for their beneficiaries.