Last year, I emptied my tax-free savings account of $135,000 to pay out my mortgage in full because I didn’t like the increase in interest rates. I am retired, so I relished the thought of being debt-free. Should I restore my TFSA balance by transferring assets out of my Canadian-dollar taxable investment account, which would entail suffering some taxable capital gains on some of those investments?
I am 70, so I’ll have to convert my Registered Retirement Savings Plan into a Registered Retirement Income Fund soon and will be taxed on withdrawals. Would it be wise to place those withdrawals, less the tax, into my TFSA?
We asked Marc Henein, an adviser at ScotiaMcLeod, to answer this one.
“Congratulations on becoming debt-free,” said Mr. Henein. “Eliminating what was likely one of your largest expense items – mortgage payments – is a major step in the right direction.”
As for when to recontribute to your TFSA, according to Mr. Henein, the short answer is: it depends. “A good starting point is to review the positions in your non-registered account and assess any capital gains or losses,” he advised. This, he added, will help inform your strategy.
“I recommend gradually recontributing to your TFSA while keeping a close eye on the tax implications.” Those implications, said Mr. Henein, include the additional tax cost of realizing capital gains, which may offset the benefit of contributing to a TFSA, so it’s important to evaluate the trade-offs carefully, he added.
A financial adviser can help guide you through the math. Additionally, Mr. Henein said that using RRIF withdrawals to help replenish your TFSA can be an effective strategy to maintain the benefits of both accounts, particularly the advantage of tax-free growth.
“I suggest speaking with a tax professional to determine the optimal income level that allows you to draw more than the RRIF minimums to support this objective,” he said. “Be mindful of your total income to ensure it stays below the OAS clawback threshold, so you can continue receiving the maximum benefit from this pension.”
Also, Mr. Henein suggested you consider taking advantage of the 2025 and 2026 tax years before your RRIF withdrawals begin. This window, he noted, may allow you to realize some capital gains in your non-registered account and transfer those assets into your TFSA. While this could mean incurring some capital gains tax now, it may be a case of short-term pain for long-term gain, as future growth within your TFSA will be tax-free.
Consult both a licensed tax adviser and your financial adviser to ensure your approach aligns with your broader financial goals, Mr. Henein said.
Do you want advice on a financial planning or retirement issue that’s affecting you? Send us an e-mail.
