Withdrawing money from a TFSA in retirement
With a TFSA, however, you can withdraw money and return it in the following year. You can’t do that with a RRIF. Once you take money out of it, you can’t get it back.
If you think you’ll need a tax-sheltered account for a large sum of money in the not-too-distant future, say, a house sale or estate, it may be best not to use a RRIF to supplement a TFSA.
Converting an RRSP to a RRIF at age 71
Have you converted your RRSP to a RRIF? If not, consider doing so. You will be eligible for a $2,000 pension tax credit. Also, which may be most important to you, you will be able to control the withholding tax on your smaller RRIF withdrawals. As a reminder, for RRSP withdrawals, the withholding tax on the first $5,000 is 10%, between $5,000 and $15,000 is 20%, and over $15,000 is 30%.
Converting your RRSP to a RRIF means no withholding tax on small withdrawals after the first calendar year of opening the account, unless requested. I have heard that it doesn’t matter that the withholding tax is high because you will get the money in the form of a tax refund when you do your taxes in the spring. But, having too much tax withheld means drawing more than necessary from your RRSP investments, increasing your average tax rate, and possibly losing out on future investment growth.
You’ve also wondered about drawing from your TFSA to make RRSP contributions. It sounds like a good idea because you get a tax deduction when you add money to an RRSP and free up TFSA room, which you can use to get some of the proceeds from the sale of a house or estate.
But there is one issue.
Drawing $10,000 from a TFSA, adding it to an RRSP, and withdrawing the money will leave you with $10,000 tax-deductible.
You just turned $10,000 into a smaller amount. You might think that the RRSP tax refund will make up for it, but it won’t. If your marginal tax rate is 20% and you make an RRSP contribution of $10,000, your tax refund will be $2,000. Sounds good, but how much did you have to earn before taxes to have the first $10,000 to invest? Was it $12,000? No, because $12,000 minus 20% comes to $9,600. You had to earn $12,500 to have $10,000 to invest. So, if you don’t want to have less money when you move from a TFSA to an RRSP, you can spend $10,000, borrow $2,500 and when you get your $2,500 tax deduction pay back the loan.
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