Retired Money: How TFSAs can give seniors more tax-free retirement funds

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If you’re a senior, the holy grail in retirement is to have as much tax-free retirement funds as possible.

My latest MoneySense Retired Money column looks at this goal: Click on the highlighted text to access the full piece:  How Seniors can use TFSAs to have more in retirement.

This site has always been a strong proponent of Tax-free Savings Accounts (TFSAs) for young people. Starting at age 18, TFSAs are great vehicles for accumulating short-term savings for goals like saving a down payment for a home, buying a new car, or even going on to post-graduate studies or starting a business. And unlike RRSPs, the $5500 annual contribution room for TFSAs does not require having earned income the previous year. So as of next week, with the arrival of 2018, it’s highly advisable to add another $5,500 to your TFSAs. But not just if you’re young!

The MoneySense column makes the point that TFSAs are equally desirable for seniors in retirement, or for those in semi-retirement who are preparing for full retirement.

Why? First, unlike the RRIFs that many RRSPs become, and which generate taxable income, TFSAs generate no taxable income: neither on the withdrawals nor the investment income (whether dividends, capital gains or interest). In addition, TFSAs do not trigger clawbacks of means-tested government retirement income programs like Old Age Security or the Guaranteed Income Supplement.

But there’s another big benefit TFSAs confer on seniors and retirees: ongoing tax-sheltering of investment income well beyond age 71. In contrast, you can no longer contribute to RRSPs after the year you turn 71 and cannot contribute new money to RRIFs: they’re strictly vehicles that shelter what you’ve got until the next forced annual withdrawal limit, which escalates over time from 5.28% at 71 to 20% a year once you reach 95.

Unlike RRSPs and RRIFs, seniors can continue to add to their TFSAs each and every year even after age 71. Even if you live past 100, as my friend Meta has (and who, as the column relates, continues to use the TFSA herself!)

Two ways seniors can get money for TFSAs without having to find “new” money

The MoneySense column describes the two major ways a senior couple can come up with the required $11,000 a year in TFSA contribution room that becomes available every January. First are those forced RRIF withdrawals, which are taxed once as you pull the money out but after that, the money can go into a TFSA and generate tax-free income from that moment forward.

The second source is non-registered investment accounts. Many seniors have a significant chunk of their wealth in non-registered investments.

Seen thus, you don’t need “new money” to make TFSA contribution in your golden years. Aim to gradually “convert” your non-registered and taxable accounts into non-taxable TFSA accounts, $5,500 a year for each spouse.

You want to make TFSA “contributions in kind” from your non-registered accounts, a procedure easily accomplished by talking to your financial institution. The article goes into the mechanics of how to do this, all the while being aware of the tax consequences of certain actions.

TFSAs should be the LAST income source seniors tap

Apart from the special case of large one-time purchases, generally TFSAs should be the LAST retirement income source seniors should tap. Regular Hub contributor Doug Dahmer is quoted in the piece to the effect that most seniors should first draw down RRIFs or RRSPs and/or tap their non-registered savings first.

The column closes with a look at yet another advantage of TFSAs for seniors: its significant role in tax-effective estate planning and passing on inheritances to the next generation(s).

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