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You hardly hear a good word said about RRSPs by retirees, but their love for TFSAs just won’t quit.
Seniors are the most avid users of tax-free savings accounts, even though they’re theoretically at the stage of life where saving can be deprioritized down to zero in some cases.
While there are low-income seniors struggling to afford food and rent, retirees as a demographic are comparatively affluent. That’s one reason why people above the age of 65 make such good use of TFSAs. Another is that TFSAs do something for retirees that cannot be overhyped – they produce tax-free income.
Take it from me as someone who has left the full-time workforce: Having lots of money in TFSAs is a retirement win, full stop.
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The more I see and hear of retirement, the more it’s apparent that there are two money streams to think about. One is your regular income, as produced by Canada Pension Plan retirement benefits, Old Age Security, personal savings and, for the fortunate minority, workplace pensions.
A second stream is money for irregular or periodic expenses that cannot be covered with regular income. Examples include big trips, home renovations, new vehicle purchases, medical and dental costs, and gifts to adult children and grandkids.
TFSAs can work for both streams, but let’s focus on the second here. While the dream retirement is living off of income and never touching the principal, the reality for most people is that they will need to withdraw some of that principal from time to time.
Registered retirement savings and registered retirement income plans irritate retirees because there’s tax owing on withdrawals, which is a bit rich. Contributions to RRSPs are tax-deductible, so of course withdrawals are taxed. Many retirees will find the tax owing on an RRSP withdrawal is less than the tax they saved when money was contributed while working.
Still, mental adjustments must be made when money is withdrawn from an RRSP or RRIF. You must convert an RRSP to a RRIF by the end of the year you turn 71.
A senior with $80,000 in annual income faces a marginal tax rate of around 28 to 37 per cent, depending on the province. An RRIF withdrawal of $50,000 becomes $36,000 and $31,500, respectively, at those tax rates. At a marginal tax rate of 28 per cent, you need to withdraw $69,445 from a RRIF to get a net $50,000.
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Evidence of retiree love for TFSAs and their tax-free withdrawals can be seen in data published by the federal government. People aged 65 to 69 had the second-highest average TFSA contribution of any age group in 2023 at $13,538. Note: The contribution limit for that year was $6,500, but you can exploit unused room from previous years at any time.
You might conclude that TFSAs beat RRSPs cleanly for retirement saving, but there’s more to the comparison than taxes. Financial planner Aaron Hector summarized the advantages of RRSPs in a recent LinkedIn post, including the fact that you can generate a pension tax credit by withdrawing money from a RRIF starting at age 65. TFSA withdrawals don’t qualify for this tax break. You can also use spousal RRSPs to get a tax deduction and then transfer future income from the plan to your spouse. Again, TFSAs don’t offer this.
The TFSAs versus RRSPs debate goes on and on. Low-income people are better off contributing to TFSAs because withdrawals won’t affect eligibility for the Guaranteed Income Supplement, unlike money taken from RRSPs. Parents will find that contributing to an RRSP lowers their taxable income, which could result in higher payments through the Canada Child Benefit. Also, TFSAs alone likely won’t be sufficient for retirement saving – you’ll need RRSPs, too.
Striving for the most tax-efficient income in retirement is a core principle in financial planning. But consideration must also be paid to what I’ll refer to here as the ‘user experience.’
TFSAs work like magic in retirement. You’ll be glad to have them, and to keep using them as you age. The demographic that contributed the most on average to TFSAs in 2023: those 80 and up, at $13,735.
Rob Carrick is a personal finance expert and former Globe and Mail staff columnist.