My latest MoneySense Retired Money column on TFSAs is now online. You can read the whole thing by clicking on this highlighted link: How retirees can use TFSAs to save on tax.
I’m a huge fan of The Tax-free Savings Account or TFSA both for young people and for seniors, and everyone between.
It’s the single most powerful investment tax shelter available to Canadian investors. (For any American readers, the TFSA is roughly the equivalent of Roth IRAs).
So if you’re a member of the much-touted “Millennial” generation, you should move heaven or earth to maximize the annual $5,500 contribution as soon as you turn 18 – even if you have to solicit a “matching” contribution from your parents.
If you’ve not yet opened up a TFSA, as of 2017 the cumulative TFSA room built up since the plan’s debut in 2009 will be $52,000. As I say in the column, for millennials the combination of the newly expanded Canada Pension Plan and a TFSA maximized from age 18 on means that by the time they are old enough to read the Retired Money column, they will be well positioned for retirement.
While late for Boomers, TFSAs can still be a boon in retirement
But as this particular MoneySense column has been dubbed “Retired Money,” the focus is on what the TFSA can do for near-retirees and seniors already retired. When it first came out in 2009, we aging baby boomers lamented the fact the TFSA hadn’t been available when we we were just starting out.
We had RRSPs of course and, lured by the tax refunds, many of us endeavoured to maximize them. But of course with RRSPs you eventually have to pay the tax piper no later than the year you turn 71, when you must convert them to RRIFs (or annuitize, or cash out and pay huge tax). Most will opt for the RRIF route but that entails forced annual — and taxable — withdrawals, the percentage of which steadily rises into your 90s.
Fortunately, unlike RRSPs — to which you can no longer contribute after age 71 — there is no such limitation for TFSAs. Even if you live past 100, each year you can keep adding the $5,500 come January, plus any inflation adjustments that may occur.
Top up TFSAs before the Liberals cut back contribution room again
I do believe you should top up your TFSA as soon as you can in January, and not just because of the time value of money.
The Liberal government has already attacked TFSAs once, moving the $10,000 annual contribution limit the Harper government had implemented for calendar 2015 back to the earlier $5,500 limit. As the MoneySense column notes, interim Conservative leader Rona Ambrose speculated in a tweet earlier this fall that the Liberals may retrench further on the TFSA.
Ambrose’s press secretary, Jake Enright, told me the party doesn’t “trust the economic promises made by the Liberal Government and Justin Trudeau.” With all the billions being spent, “the Liberals might cut the TFSA even further to pay back all that money.”
TFSAs are so popular I doubt they’d dare introduce retroactive legislation, so I’d maximize contributions while the going is good: as soon as the new year begins in January.
And if you’re concerned about another political attack on TFSA contribution room, that Working Canadians petition we wrote about shortly after the Liberals came to power is still out there: Save our TFSAs. The issue has been dormant and most of us are relieved we still have the $5,500 room but if another attempt is made to cut back further, I predict there will be howls of protest, especially from the middle class the government supposedly wishes to help: the TFSA is the best thing to come along for middle-class taxpayers that I can think of, including soon-to-be retired and already-retired people.
How to top up in January if you don’t have ready cash
During the election campaign, Justin Trudeau famously used as a justification for retrenching on TFSA room the lame excuse that “no one has $10,000 lying around.” This assertion, as I pointed out at the time, was demonstrably false, since many seniors and even those in mid career have large non-registered investment portfolios and/or large RRIFs, both of which can be used to fund TFSAs.
The MoneySense column goes into detail on the mechanics of moving funds from RRSPs or RRIFs into TFSAs, or of transferring-in-kind securities from non-registered investment portfolios.
Since tax is the single biggest expense in retirement, the chief objective in your 60s and beyond should be to move as much money as possible from RRSPs, RRIFs and non-registered investments INTO your TFSA. Sandy Aitken, developer of TFSA Maximizer, warns many seniors with looming million-dollar RRIFs will have a huge tax problem if they wait till age 71 and have to start taking forced annual (and taxable) withdrawals from their RRIFs. The earlier they can withdraw RRSP or RRIF funds at more favorable tax rates, the better.
So job one for senior couples is to top up TFSAs to the tune of $11,000 a year ($5,500 for each spouse). Remember the benefits: while RRSPs and RRIFs are merely tax deferred, every dollar you stuff into a TFSA will generate a totally tax-free flow of income (whether generated by interest, dividends or capital gains). Also keep in mind this income will not trigger clawbacks of Old Age Security or the Guaranteed Income Supplement.
If instead of contributing cash you choose to fund TFSA contributions from transfers-in-kind or RRSP or RRIF withdrawals, there may be immediate tax consequences. However this will be a one-time hit, in return for which you will have a larger flow of tax-free income coming from your TFSA.
Short-term tax pain for long-term tax-free pleasure!
P.S. My Motley Fool podcast on Victory Lap Retirement
Note that I use the term Victory Lap in this column, although I didn’t use it in the MoneySense version. Victory Lap is of course my shorthand for describing the period of semi-retirement that occurs after one’s primary career and before entering what used to be called full-stop retirement. By now, readers will be familiar with the book I co-authored with Mike Drak on this: Victory Lap Retirement, which is now an Amazon bestseller. And for fans of the Motley Fool podcasts, here is a 15-minute interview with me about the book, which appeared on Wednesday.