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How Retirees Can Make Good Use Of TFSAs

Young people can take advantage of decades of TFSA contribution room to accumulate enough savings to be well positioned for retirement when the time comes.

But for those close to, or already in retirement, TFSAs have not been around long enough to be a large portion of retirement savings. It’s more likely that you have built up a substantial portfolio in your RRSP and non-registered accounts.

Consider using these strategies to make the most of your TFSA in retirement.

Continue tax-free savings

Taxes may be the single biggest expense in retirement, especially once you convert a large RRSP to a RRIF. Forced minimum withdrawals often put retirees in the position of having to take out more money than they need, pushing them into a higher tax bracket.

Instead of waiting until age 72 it may make more sense to start withdrawals earlier if you’ll be at a lower tax rate. Even if you don’t wait, just because you must withdraw a minimum RRIF amount, it doesn’t mean you have to spend it all if you don’t need to.

You will still have immediate tax consequences, but if you redirect the surplus to your TFSA it will continue to grow and provide totally tax-free income in the future, whether generated from interest, dividends or capital gains.

You can no longer contribute to a RRSP after the year you turn 71, but there is no age limit for contributions to a TFSA, so you can tax shelter any new savings indefinitely.

If you have a non-registered portfolio you can make transfers “in kind” of stocks, bonds, ETFs and mutual funds.

Supplementing Income

TFSAs are a great way to supplement income in retirement. The withdrawals don’t affect your eligibility for programs like the Guaranteed Income Supplement and Age Tax Credit, and don’t result in Old Age Security clawbacks.

If you have an occasional large one-time expense such as home repairs, a new vehicle, or even a long-anticipated dream vacation, you can withdraw funds from your TFSA and then re-contribute them in a future year.

Useful estate planning tool

Many older Canadians are concerned about the tax consequences of passing away with a large balance in their retirement accounts. If you don’t have a spouse you can name as beneficiary, RRSPs and RRIFs are terminated when you die, and all the money is reported as income on your final tax return. This can result in a substantial tax bite.

Since balances in TFSAs are not subject to taxes upon death, they can be used as a valuable estate planning tool.

If you have a spouse, make sure you name each other “successor holder.” That way the account continues to exist, and the surviving spouse becomes the new account holder.

If you want a child or other heir to receive your assets, name them as designated beneficiaries. Beneficiaries receive the assets tax free. They can also contribute any amount they receive to their own TFSA as long as they have contribution room available.

Final thoughts

Tax Free Savings Accounts give retirees the potential to save money indefinitely in retirement and the flexibility to make withdrawals without affecting eligibility for government programs.

Smart planning will help you use the TFSA to preserve the wealth you have worked hard to build and ensure a tax-free inheritance for the people you care about.

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9 Comments

  1. Jt on February 16, 2018 at 7:05 am

    What do you mean transfer stocks In kind .to tfsa

    • Ron on February 16, 2018 at 11:59 am

      If you have a non-registered account containing stock, you could sell the stock and transfer the cash to the TFSA and buy the stock back or you transfer the stock from your non-registered account to your TFSA without selling it. This is a transfer in kind. I would think most brokerages would do this. BMO Investorline certainly does.

  2. Loonie Doctor on February 16, 2018 at 9:38 am

    A lot of emphasis in planning is put on the accumulation phase, but as you point out having a good exit plan for drawing down on savings while minimizing the taxes and claw-backs is also key. That requires forethought and to do well. It seems to be becoming increasingly complicated as we have more tools to balance off of each other and also a moving target in terms of marginal tax rates (which have been aggressively ramping up recently for those of us in the higher income ranges).

  3. Angelo Bin on February 16, 2018 at 10:38 am

    I warn everyone about transferring from non-registered to TFSA, this does have tax consequences even when transferring ‘in kind’. The CRA considers any transfers as if you sold the assets and you are responsible for any capital gains.
    This is particularly galling when you are made to transfer from a RRIF to a non-registered account, paying the total amount as taxable, and then when you transfer those same assets to a TFSA, you get hit with any capital gains you have accumulated in that equity. So you actually get to pay taxes twice on the same assets, even when you transfer ‘in kind’.

    • Ron on February 16, 2018 at 12:13 pm

      I agree that CRA treats any transfers in kind from a non-registered account to a TFSA the same as if you had sold the stock. Either way you have a gain. If I transfer $10,000 in stock from my RRIF to a non-registered account, the $10,000 is considered a distribution from the RRIF and is taxable (like any other distribution from a RRIF). If I subsequently transfer those assets to a TFSA and they have now grown to $12,000 , the only capital gain is on $2,000 (like any other stock transaction where there is a gain). Not sure how you are paying twice on the same assets.

      • boomer on February 16, 2018 at 3:50 pm

        Ron, you are correct. People shouldn’t think they can avoid paying tax by doing an in kind transfer. The same withdrawal rules apply as if you take the cash – full RRSP/RRIF amount taxed as income, half capital gains taxed from non-registered account. Not taxed twice on the same assets as Angelo seems to imply.
        One advantage of in kind transfers is you don’t have to pay the transaction fees you would have if you sold and rebought the securities.

  4. sara on February 18, 2018 at 10:33 pm

    US stocks in TFSA are subject to 15% Withholding tax. RRSP is not. Also Withholding tax on US stocks held under TFSA cannot be used for foreign dividend tax credit

  5. John on February 25, 2018 at 11:38 pm

    We would like to know your thoughts on taking enough money yearly from our RRIF accounts and putting it into our TFSA. We have been using our savings yearly to put into the TFSA, but thought maybe it would be a better idea to draw more from the RRIF. We don’t need the amount we have to draw out yearly, so reinvesting it into the TFSA seems like a good idea. Would prefer to end up with just the TFSA.

    • boomer on February 26, 2018 at 10:23 am

      I think that would be a terrific idea, John. Keep in mind that you have to pay tax on the RRIF withdrawal so be mindful of your marginal tax rate. Also, think about your estate planning. Drawing down your RRIF will reduce the balance which will minimize your final taxes (either to yourself or your spouse once you are both gone) while the money in a TFSA goes to beneficiaries tax free.

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