Q – I have a TFSA, just because I heard it’s the thing to do with our money. I am 72, husband 73. I really don’t understand how the account works. Do I get a bonus of some kind? Do I pay when I take money out?
At our age, do I cash out our RRIF and put it in there? I’m sorry but I just don’t get it. Thank you for any advice you can give us. June & Ron S., Burlington, Ontario
A – First let me say that opening a TFSA was the right thing to do, even though you’re not sure why. With all the savings options we have in this country (RRSPs, RRIFs, TFSAs, LIFs) it’s very easy to get confused about which choice is best.
At your age, the TFSA is the only plan to which you can make contributions. RRSPs have to be collapsed by the end of the year you turn 71 and new contributions to RRIFs and LIFs aren’t allowed.
There are two major differences between an RRSP and a TFSA. A contribution to an RRSP generates a tax deduction, but any money withdrawn is taxed. There is no deduction for a TFSA contribution, but the money can be taken out at any time tax-free.
This makes a TFSA a good choice for seniors who qualify for the guaranteed income supplement (GIS). Most income, including RRSP/RRIF withdrawals, reduces the amount you receive from a GIS payment. A TFSA withdrawal doesn’t do that.
Unless you are in a low tax bracket, I would not advise taking capital from a RRIF to put into a TFSA because you’ll be taxed on any RRIF withdrawal. Rather, use the TFSA for any savings you have. If you don’t need all the money from your required RRIF withdrawals, put it there (up to the legal contribution limit).
Don’t keep the TFSA money in a low-interest savings account. The whole idea of the plan is to invest in securities that pay a decent return, which will be tax-free to you. You’ll find lots of ideas in my Income Investor newsletter. Details at www.buildingwealth.ca/subscribe.
If you want to know more, I’ve written two books on TFSAs. They should be available on the Amazon and Indigo websites. – G.P.