Take Advantage of Your Tax Free Savings Account in Retirement
When the Tax Free Savings Account was introduced in 2009 it was easy to give it a pass for retirement savings. After all, the $5,000 annual contribution limit seemed fairly insignificant unless you just wanted to use it as a savings account.
For those of us close to, or already in retirement, TFSAs haven’t been around long enough to be a large portion of retirement savings as compared to a RRSP.
But, ten years in, we now have TFSA contribution room of $63,500 (double that if you have a spouse) and it’s starting to be a game-changer for using it as supplementary income in retirement. It’s more versatile than you think. It can be used for short-term savings goals, or as part of a longer-term investment strategy.
TFSAs can hold a wide variety of investments
Just like the Registered Retirement Savings Plan (RRSP), TFSAs can hold many different types of investments. First think about how you want to use it. Choosing which investment depends on your time frame, investing plan, risk tolerance and financial position.
Banks love to advertise higher TFSA interest rates from time to time. These promotional rates are usually for new deposits and always just for a limited time. Once that period expires, you’re left with a puny return.
That said, if you need liquidity as well as low risk, a high-interest savings account may be perfect for you.
GIC’s are also ideal for conservative investors who want to keep some money out of the stock market.
A TFSA makes a great retirement account due to the types of investments you can hold inside it. Because the greatest benefit of the TFSA is the tax-free growth, you might want to consider investments that have an opportunity for greater growth. Here are some investment options to consider.
Bonds come in many different forms – government and corporate bonds, short- and long-term. Some investors like bonds because they can be cashed at any time. Bonds can be traded on the open market before maturity so values can fluctuate and either increase or decrease in value. Or you can opt for bond funds or bond ETFs.
Mutual funds. One of the biggest criticisms of mutual funds is the high management fees investors pay. Lower cost index funds are available such as Tangerine mutual funds and TD e-Series funds.
Exchange traded funds. ETFs typically mirror an index or benchmark. Unlike mutual funds they are traded on a stock exchange. They are a low-cost way to get great diversification. Use Canadian listed ETFs that invest in Canadian and/or foreign equities. You can buy them yourself in a self-directed trading account, or through a Robo Advisor.
Individual stocks. I think the best stocks for a TFSA are income-generating dividend payers such as Canadian banks, telecoms, pipelines and real estate investment trusts. Stick to low risk stocks and don’t speculate – you can’t claim capital losses.
Savvy investors who bought equities back in early 2009 got them at rock bottom prices and are looking at significant gains inside their TFSAs.
The interest, dividends and capital gains created in the account are not taxed. Your money grows
An important part of your retirement plan
Having a TFSA is part of a well-thought out retirement income plan.
They are a great way to supplement income in retirement. The withdrawals aren’t considered income, so they don’t affect your eligibility for programs like the Age Tax Credit and Guaranteed Income Supplement, and don’t result in Old Age Security clawbacks.
One of the challenges of living on a fixed income is that expenses can be variable from year-to-year. Retirees can withdraw from their Tax Free Savings Accounts and use the money for one-time expenses such as home repairs, a new vehicle, or a long-anticipated dream vacation without having to tap into their fixed monthly income.
There is no age limit for contributions to a TFSA, so you can tax shelter any new savings indefinitely
You can make transfers “
A useful estate planning tool
Balances in TFSAs are not subject to taxes upon death, so 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.
The bottom line
The Tax Free Savings Account is a fantastic savings vehicle that gives retirees the potential to save money indefinitely in retirement and the flexibility to make withdrawals to supplement their income without affecting eligibility for government programs.
Money can be withdrawn from a TFSA at any time, with no tax consequences. Any amount you withdraw is added back to your contribution limit for the following year. Plus you can carry forward any unused contributions from year to year.
They can and should be used to complement your RRSP or even be used as your primary retirement savings account, depending on your income.
Finally, you can use Tax Free Savings Accounts as an estate planning tool by building a tax-free inheritance for the people you care about.