How to make the most of your TFSAs in retirement
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.