Are you aware of the incredible benefits that Tax-Free Savings Accounts (TFSAs) offer for your retirement? While your Registered Retirement Savings Plan (RRSP) has certain limitations, TFSAs give you the freedom to contribute for as long as you live, regardless of your age. In this article, we will explore the strategies to make the most of your TFSAs in retirement and how they can complement your RRSPs effectively.
The Advantages of TFSAs
Unlike RRSPs, TFSAs are not tied to your earned income and anyone above the age of 18 with a Social Insurance Number (SIN) can contribute to them. Although most near-retirees may have more wealth invested in RRSPs, TFSAs offer unique opportunities to grow your savings without any tax implications on withdrawals.
Maximizing Your RRIF Strategy
Once you turn 71, you have three options for collapsing your RRSP, with the most common being the registered retirement income fund (RRIF). By converting your RRSP to a RRIF, you can transfer your investments intact and continue to earn interest, dividends, and capital gains while enjoying tax-sheltered growth. However, it's important to note that yearly minimum withdrawals from your RRIF are taxable at your top marginal rate. With careful planning, early withdrawals in your 60s can optimize your RRSP while lowering your tax obligations.
Tips for Married Couples
If you and your spouse have RRIFs of different sizes, drawing down on the larger RRIF first, especially if the annuitant is 65 or older, can be advantageous. RRIF income is considered eligible pension income for pension splitting, meaning that withdrawals in one spouse's name can be split on both spouses' tax returns. This strategy helps reduce total taxes owed and increases the net payment received.
The Power of TFSAs in Retirement
While you are required to withdraw from your RRSP-turned-RRIF, you are not obligated to spend the money. Instead, consider allocating your after-tax RRIF income into your TFSA, up to the annual $6,000 contribution limit. Unlike RRSPs, any growth in your TFSA is entirely tax-free. Additionally, contributing to your TFSA has no impact on income-tested benefits such as Old Age Security and Guaranteed Income Supplement, making it an ideal choice for retirees with lower incomes.
TFSA Contribution Room
As of 2020, the cumulative TFSA contribution room is $69,500, and effective from January 1, 2021, the annual contribution limit is $6,000. This means that if you have never contributed before, you can make a total contribution of $75,500. Take advantage of this opportunity to boost your retirement savings.
The Right Asset Mix for TFSAs
Consider your investment strategy when it comes to TFSAs. For younger individuals, an aggressive approach with 80% equities may be suitable. However, for retirees, it is recommended to adopt a more balanced mix of 50% stocks and 50% fixed income. This approach takes into account the time horizon, typically 10 years or more, and the need for preserving capital. It is crucial to carefully designate beneficiaries to ensure your TFSA assets are distributed according to your wishes.
Author: Jonathan Chevreau Image: Jonathan Chevreau
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Conclusion
By incorporating TFSAs into your retirement planning, you can maximize your savings potential and enjoy tax-free growth. Utilizing RRIF strategies and leveraging the benefits of TFSAs will provide you with financial security and flexibility during your retirement years. Remember, the TFSA is your savings vehicle of choice, offering tax-free growth and the potential for a comfortable retirement.
Disclaimer: The author is an Investing Editor at Large and founder of the Financial Independence Hub. He can be reached at [email protected]