6 reasons you need a TFSA when you’re retired

Registered Retirement Savings Plans (RRSPs) have long been a popular choice for retirement planning. Canada’s other pillar of savings, the Tax-Free Savings Account (TFSA), is not as popular as a retirement savings tool as it could be.

TFSAs offer flexibility, to help save for — and in — retirement and get at your savings when you need it. Despite its advantages, Canadians aren’t taking full advantage of TFSAs. The most recent published data from Canada Revenue Agency (CRA) from the 2020 contribution year showed that, on average, TFSA holders have $40,781 of contribution room available to save.

If you’re not saving in, or maximizing, a TFSA – you might want to reconsider. Especially if you’re retired or about to be. Read on to see why the TFSA might be one of the most powerful tools in retirement.

1. The tax-free advantage

Unlike many other retirement income solutions, the TFSA offers the unique advantage of tax-free withdrawals. This means that any money you withdraw from your TFSA in retirement will not be subject to income tax. This allows you to keep more of your savings.

2. Flexible withdrawals with no restrictions

Unlike other retirement accounts, TFSAs don’t have minimum or maximum withdrawal requirements. If you need money for a big expense or small amounts to supplement your income, the TFSA gives you that control. You can make withdrawals to pay for home renovations, travel, medical costs, or help family members. Any savings you withdraw can also be recontributed in future years without affecting your annual TFSA limit. This level of flexibility can be invaluable as you navigate the potential ups and downs of retirement.

3. Protect your government benefits

An often-overlooked advantage of the TFSA is how it doesn’t affect your ability to qualify for income-tested government benefits like Old Age Security (OAS) or Guaranteed Income Supplement (GIS). Unlike other retirement income sources, the government doesn’t consider TFSA withdrawals taxable income. This means that taking money from your TFSA savings won’t change your ability to receive these important government benefits.

4. No age limit for contributions

You can keep contributing to a TFSA for as long as you live. That’s unlike an RRSP where, at age 71, you must cash them out, transfer them to a Registered Retirement Income Fund (RRIF) or use them to purchase an annuity.  As long as you have contribution room, you can keep contributing to your TFSA at any age. By investing your savings within the TFSA, your money can grow tax-free. This can help allow your nest egg to compound more efficiently over time.

5. Produce tax-free income

Within your TFSA, you have the flexibility to allocate your savings in a way that generates tax-free income. This could involve investing in mutual funds, guaranteed investment certificates (GICs), exchange-traded funds (ETFs), etc. The key is that any income or growth generated within your TFSA will be completely tax-free. This can help provide you with a reliable stream of passive retirement income.

6. Leave a tax-free legacy

The TFSA can be a powerful tool for estate planning. When you name a beneficiary for your TFSA, you can help ensure you pass any savings on tax-free when you die. This can be a meaningful way to leave a legacy and provide financial help to your family. A TFSA also allows you to name your spouse or common-law partner as the “successor holder” of the account anywhere in Canada except Quebec. If you pass away, your spouse or partner will become the new account holder. They’ll have all the rights and responsibilities of the original account holder, including the ability to change any beneficiary designations.

How much can you save in a TFSA in retirement?

Do you have a TFSA already? Check your contribution room through ‘My Account’ on the Canada Revenue Agency (CRA) website or by calling the CRA.

Are you looking to open a TFSA for the first time? Assuming you’ve been a resident of Canada and 18 years of age or older when the Government of Canada first introduced TFSAs (in 2009) then your contribution room could be as much as $95,000 (in 2024).

Unlock the power of the TFSA for your retirement

The TFSA is a versatile and powerful tool for retirement planning. You can take advantage of its tax-free growth, flexible withdrawals, and protection of government benefits to help maximize your retirement income.

Whether you’re nearing or already in retirement, talk to your advisor about how to include a TFSA into your retirement strategy.