The Globe and Mail
Q: I’ve spent years investing in my RRSP, with a minimal amount going to my TFSA. When is it time to switch to investing more in my TFSA? I’m 62 and plan to retire at 65.
We asked Leslie Logan, senior financial planner at TD Wealth, to answer this one.
Let’s start by looking at the difference between a tax-free savings account and a registered retirement savings plan. According to Ms. Logan, both can play an important role in a well‑rounded plan.
A TFSA is funded with after‑tax dollars and grows completely tax free, she said. “This means there are no annual tax slips, and withdrawals can be made at any time without triggering tax. However, because contributions are made with after‑tax money, a TFSA does not reduce your income or generate a lovely tax refund.”
An RRSP, on the other hand, allows you to deduct contributions from your income today, reducing your current tax bill. “Those funds then grow on a tax‑deferred basis until withdrawn, at which point the entire amount is taxed as income – much like a paycheque,” Ms. Logan said.
She also advised that, for higher earners, contributing to an RRSP often works very well. The general idea is to contribute while your tax rate is high during your working years, and withdraw later when your income – and tax rate – are lower, creating a tax savings from entry to exit.
How will the life insurance on our corporation be distributed among our children?
“Where this strategy can fall short (and when RRSP sentiment can sour), is when income doesn’t actually decrease in retirement,” Ms. Logan said. “Strong personal savings, a solid pension or multiple income sources can result in a similar – or even higher – tax rate later in life.” In those cases, she noted that the tax benefit initially received may largely be given back upon withdrawal.
When this is a concern, Ms. Logan works with her clients to identify an appropriate minimum RRSP level during working years and direct additional savings into a TFSA instead.
“If you haven’t maximized your TFSA or your balance is still relatively modest, it can be worthwhile to focus on building that up,” she said. “This helps ensure that not all of your retirement income is taxable. It’s easy to overlook how much of our future income will be subject to tax.”
I’m 67 and plan to delay CPP. Would I lose all spousal benefits once I opt in?
Government benefits, employer pensions and RRSP withdrawals are all taxable, which makes it important to factor in the after-tax amount when planning. “Ultimately, what matters most is the net income that actually reaches your bank account,” Ms. Logan said.
Having too much concentrated in an RRSP can also create challenges, particularly when large, unexpected expenses arise. Maintaining funds within a TFSA can help manage any lump‑sum needs more efficiently, provide flexibility and support a more tax‑efficient income strategy throughout retirement. Ms. Logan cited this example: If a home repair or vehicle replacement requires $35,000 after tax, with a marginal rate of 40 per cent, the actual RRSP withdrawal necessary to cover it could be closer to $55,000 – all of which is added to your income for that year.
Having a portion of your savings invested in a tax-free vehicle – such as a TFSA – can provide valuable flexibility and help create a more balanced, tax-efficient retirement income plan.
Do you want advice on a financial planning or retirement issue that’s affecting you? Send us an e-mail.
