# TFSA vs RRSP Considerations for Withdrawals During Retirement



## jcgd (Oct 30, 2011)

I've read many times that you will end up with around the same amount of money regardless of whether you invest in the TFSA or the RRSP when it comes to retirement. My question is, would the exclusion of TFSA withdrawals from your taxable income create large differences in your final income when considering CPP and any other benefits?


----------



## MoneyGal (Apr 24, 2009)

I don't understand your question. 

CPP benefits are not income-dependent. 

That's all I got.


----------



## jcgd (Oct 30, 2011)

Well that's exactly what I meant, so thanks. I don't know much about CPP and OAS. It could affect OAS couldn't it? If my income was exceeding $66k per year?

http://www.servicecanada.gc.ca/eng/isp/pub/oas/oas.shtml
_15. Is my Old Age Security pension taxable and is there a maximum amount of income I can earn and still receive OAS?

Like most other retirement income, your basic Old Age Security pension is taxable income. Pensioners who earn individual net income of $66,335 or more as of 2009 (including the Old Age Security pension) have to repay part of their pension benefits (see our Web page about The Repayment of Old Age Security Pension Benefits). These repayments are normally deducted each month from your pension payment. Each year we adjust the maximum income amount to account for inflation.

If you are a non-resident of Canada for income tax purposes, your Old Age Security pension may be subject to non-resident tax up to a maximum of 25% of the gross benefit amount. The tax rate depends on the country where you live._


----------



## jcgd (Oct 30, 2011)

To clarify my question, if I have a taxable income of over $66k from rrsp withdrawls, CPP, OAS I could lose some OAS, correct?
If my income instead came from TFSA instead of RRSP this would not be the case?


----------



## MoneyGal (Apr 24, 2009)

Yes, you understand this correctly. :encouragement:


----------



## Koala (Jan 27, 2012)

How long do you think it will take for the government to change the GIS and maybe even the OAS rules when it comes to the TFSA? $220000 in today's dollars + interest/gains beyond inflation over 40 years is a decent amount to draw a passive income from. That's assuming that GIS will even be around in 40 years.


----------



## MoneyGal (Apr 24, 2009)

My money's on "how long do you think it will take for the government to change the TFSA limit"?


----------



## Koala (Jan 27, 2012)

That too. Just thinking about retirement gives me a sense of dread sometimes. Who knows what can change by then :cower:


----------



## Barwelle (Feb 23, 2011)

It will be interesting how the TFSA will play out. Sometimes I wonder if the TFSA was instated partly to divert income away from RRSPs, so that the current government can tax that income now instead of guaranteeing future governments some income to tax when the RRSPs are withdrawn from. But then, as the years go on, this will build up into a huge amount of investment income that future governments won't be (or, at least, shouldn't be) allowed to tax.


----------



## andrewf (Mar 1, 2010)

TFSA + OAS are untenable. One of them has to go, in the long run.


----------



## steve41 (Apr 18, 2009)

Barwelle said:


> It will be interesting how the TFSA will play out. Sometimes I wonder if the TFSA was instated partly to divert income away from RRSPs, so that the current government can tax that income now instead of guaranteeing future governments some income to tax when the RRSPs are withdrawn from. But then, as the years go on, this will build up into a huge amount of investment income that future governments won't be (or, at least, shouldn't be) allowed to tax.


 I have thought exactly the same thing.


----------



## mrPPincer (Nov 21, 2011)

I may have jinxed the whole thing, like when you cause it to rain by washing your car.
I have already converted my rrsp to a rrif before the age of 50 in the hopes of applying for early CPP at age 60 and OAS and (hopefully) some GIS by age 67
I don't have very high hopes of it not being made into a mistake in planning due to future changes in legislation.


----------



## Charlie (May 20, 2011)

I suspect they'll come up with some imputed "pension adjustment" type calculation that will bump your income for OAS/GIS determinations without it being taxable. They do a similar income and deduction for WCB income. Otherwise many seniors with comfortable retirement saving will be eligible for GIS. I'd expect this in about 5 yrs once people get a chance to put more into the TFSAs. 

I can't see how they could tax them and the political push to make retirement plans more restrictive just isn't there.


----------



## Elbyron (Apr 3, 2009)

How exactly could they ever make OAS/GIS clawbacks dependant on withdrawals from a TFSA, given that there is no penalty for early TFSA withdrawal? I mean, if they tried to count the funds that I withdraw from a TFSA as income for the purposes of OAS/GIS, then I would just pull out the majority of my money from the TFSA just before the year I turn 65, and hold it in a non-registered account (or even just a savings account). Sure, any future gains on the funds would be taxable, but at least you wouldn't be losing benefits for using your hard-earned and carefully saved money! They would basically have to start basing OAS/GIS clawbacks not just on income, but also on total savings. And while some might say that this would be a good idea (those who believe OAS should only be for those who really need social assistance), I'm pretty sure it would be rather difficult for the government to enforce.


----------



## Barwelle (Feb 23, 2011)

Elbyron said:


> How exactly could they ever make OAS/GIS clawbacks dependant on withdrawals from a TFSA


I'm no expert on retirement tax situations... but wouldn't it be as simple as "You are qualified for $X/mo of benefits, but since you withdrew $Y from your TFSA last year, we are taking back $Z of your benefits" ? You know, have the clawback based on income + TFSA withdrawals?

The TFSA would still be tax-free, just that if you were withdrawing large amounts from it to fund your retirement, they would reduce your benefits.

You're right though, it wouldn't be an easy thing to pass under the noses of Canadians.


----------



## Charlie (May 20, 2011)

If you 'deregister' your TFSA at 65 then the income from the portfolio hits your tax return, and you're in no different a position than people today with unregistered portfolios.

It's conceivable a couple will have well over $1m in today's dollars in their TFSA if they contribute for almost 50 yrs. GIS (and to some extent OAS more recently) are supposed to be needs based. I can't see them not addressing this 'income' source in determining eligibility for benefits. Maybe they just compute a percentage of your opening balance and ignore your actual withdrawals? No idea. Those battle will be had at a later time...with the requisite hollers of injustice....


----------



## Elbyron (Apr 3, 2009)

Barwelle said:


> I'm no expert on retirement tax situations... but wouldn't it be as simple as "You are qualified for $X/mo of benefits, but since you withdrew $Y from your TFSA last year, we are taking back $Z of your benefits" ?


If they base it on the previous year's withdrawals, then I could just withdraw it all in the year I turn 63. Then by the time I'm 65, my TFSA withdrawals for the previous year will always be zero. I lose the tax-free growth, but I don't lose the benefits.



Charlie said:


> you're in no different a position than people today with unregistered portfolios.


Correct, and people with unregistered portfolios do not have withdrawals from them affecting their OAS and GIS benefits. If they did make the TFSA withdrawals count, one would have to do a careful analysis to see if the amount of OAS clawbacks is worth it to continue the tax-free growth in the TFSA account - especially if one has planned to have a low taxable income by focusing on TFSA over RRSP.


----------



## Barwelle (Feb 23, 2011)

Elbyron said:


> If they base it on the previous year's withdrawals, then I could just withdraw it all in the year I turn 63. Then by the time I'm 65, my TFSA withdrawals for the previous year will always be zero. I lose the tax-free growth, but I don't lose the benefits.


I thought of that too. It's not a perfect system for that reason, but either way, they'd get something out of your TFSA.

Re: your second paragraph: Doesn't income from dividends/distributions/interest count towards OAS clawbacks?


----------



## Elbyron (Apr 3, 2009)

Probably. Though if its earned in a TFSA and is thus non-taxable, I'm not so sure. In any case, most people would be withdrawing a lot more from their portfolio than just the earned income. So unless that income was enough to completely bring your OAS down to zero (which would mean one hell of a retirement savings), then pulling out some of the capital from a TFSA would further reduce your OAS benefit, but not pulling from a non-registered investment. Of course this is assuming they changed the rules.


----------



## Eclectic12 (Oct 20, 2010)

Barwelle said:


> ...But then, as the years go on, this will build up into a huge amount of investment income that future governments won't be (or, at least, shouldn't be) allowed to tax.


As usual, when the TFSA holder dies - what happens is not that cut and dried. 

Not naming a beneficiary or naming a non-spouse (or partner) as beneficiary means the income paid after date of death (DoD) is taxable income for either the estate or the beneficiary. The proceeds from the TFSA are paid to the estate, likely meaning it's taxable.

Naming a spouse (or partner) as beneficiary or successor holder allows until Dec 31st of that year to transfer to their own TFSA tax free, without affecting the beneficiary's TFSA contribution room where a form has to filed within 30 days of the transfer. 

It is good to avoid naming a spouse (or partner) as beneficiary as unlike the spouse who is the successor holder, after DoD any increase in fair market value or payments made until the transfer to the spouse's TFSA has occurred are taxed a ordinary income. So this means capital gains and dividends will be taxed more heavily than usual.


So at death - the taxes may be delayed but even if one is on top of the ins and outs, there will be taxes to pay eventually.

http://www.fiscalagents.com/newsletter/4ca_gi_whenTFSAholderdies.shtml
http://canadianaccountanttips.blogspot.ca/2010/11/what-will-happen-to-your-tfsa-when-you.html


What's the saying about death and taxes? :biggrin:


Cheers


----------



## Spudd (Oct 11, 2011)

I'm confused by this part of your post:


> Naming a spouse (or partner) as beneficiary or successor holder allows until Dec 31st of that year to transfer to their own TFSA tax free, without affecting the beneficiary's TFSA contribution room where a form has to filed within 30 days of the transfer.
> 
> It is good to avoid naming a spouse (or partner) as beneficiary as unlike the spouse who is the successor holder, after DoD any increase in fair market value or payments made until the transfer to the spouse's TFSA has occurred are taxed a ordinary income. So this means capital gains and dividends will be taxed more heavily than usual.


The first paragraph makes it seem like you should name your spouse as beneficiary, but the 2nd says it is good to avoid that. Can you clarify?


----------



## Eclectic12 (Oct 20, 2010)

Barwelle said:


> ...Re: your second paragraph: Doesn't income from dividends/distributions/interest count towards OAS clawbacks?





Elbyron said:


> Probably. Though if its earned in a TFSA and is thus non-taxable, I'm not so sure. ...


As I read it, the second paragraph is referring to those with taxable accounts so in that case, dividends/distributions/interest all will count towards income. The only payment I am aware of that won't is capital gains.

Another factor is that dividends are bad from an OAS clawback perspective as the dividends are "grossed up" so that number that increases the income (which is used to figure out the OAS clawback) more than what was actually paid.
http://www.moneyplanacademy.com/maximizing-oas-how-to-avoid-the-clawback/
http://www.milliondollarjourney.com/old-age-security-and-the-oas-clawback.htm


Finally - as mentioned in my other post, if you are TFSA beneficiary, you need to get the proceeds transferred into your TFSA asap as any increase in fair market value or payments made to the deceased's TFSA are included in _your income_ as the full amount. This will increase the yearly income so that it might increase the OAS clawback. Then too - any delays are bad as cash payments that are capital gains or stock sales have to be reported as income whereas they would normally be capital gains that won't affect income.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

Spudd said:


> The first paragraph makes it seem like you should name your spouse as beneficiary, but the 2nd says it is good to avoid that. Can you clarify?


The spouse who is a beneficiary has to report as income any payments made after the date of death as well as any increase in value.

The spouse who is a successor holder gets to transfer the entire TFSA at the date of transfer, tax free into their own TFSA. So any payments made after the TFSA owner died or increases in value are also tax free.


To illustrate, say that Fred dies on Feb 18th, 2013, where the fair market value on that date of the TFSA was $8K. With the funeral arrangements and time for the bank to make the TFSA transfer, the transfer is completed on June 2nd, 2013, where the sum total is now $9.5K (with $1K being share prices rising and $0.5K being dividends). Sarah now files the appropriate form with CRA, 10 days after the transfer.

Sarah has met the requirements (i.e. filing the form in 30 days and transferring by Dec 31st) so that the Date of Death value (i.e. $8K) is completely tax free plus does not affect Sarah's TFSA contribution room.

If Sarah is a beneficiary, the increase is *not tax fee* so that she has to report $1.5K as income on her 2013 tax return (dividend or no dividends, capital gain or no capital gain, sold stock or didn't sell stock).

If Sarah is a successor holder, the increase is tax free and there is nothing to report on her tax return.


So naming a spouse as beneficiary provides a partial benefit where naming the spouse as successor holder provides a full benefit.

I hope this makes it clear.


Cheers


----------



## Spudd (Oct 11, 2011)

I see, I didn't realize there were separate things (successor holder & beneficiary). I thought they were just synonyms. Guess we better call our bank and make sure we are each other's successor holders.


----------



## Koala (Jan 27, 2012)

Charlie said:


> I suspect they'll come up with some imputed "pension adjustment" type calculation that will bump your income for OAS/GIS determinations without it being taxable. They do a similar income and deduction for WCB income. Otherwise many seniors with comfortable retirement saving will be eligible for GIS. I'd expect this in about 5 yrs once people get a chance to put more into the TFSAs.
> 
> I can't see how they could tax them and the political push to make retirement plans more restrictive just isn't there.


That's along the lines of what I was thinking. Income from the TFSAs could be used to reduce GIS and OAS. Tax wouldn't be paid on that income. Sometimes I feel more pessimistic about the future than others. Maybe by the time I retire OAS will be scrapped altogether, or maybe there will be a new benefit in addition to OAS or GIS - so many unknowns!

I do think they rolled out the TFSAs without a great amount of forethought. Look at the changes already, with the provinces and the successor/beneficiary rules (although the feds aren't really to blame there). People could also overcontribute on purpose, pay the penalty, and withdraw the excess to increase their contribution room the following Jan. That was changed, but if things had been properly planned it shouldn't have occurred in the first place.


----------



## Eclectic12 (Oct 20, 2010)

Spudd said:


> I see, I didn't realize there were separate things (successor holder & beneficiary). I thought they were just synonyms. Guess we better call our bank and make sure we are each other's successor holders.


Until this morning, I would have thought the same. I was checking tax implications as I was pretty sure if there was no beneficiary, the estate would get a big tax bill on the death of the TFSA holder but ran into the articles highlighting the difference between the successor holder and beneficiary. 




Koala said:


> ... I do think they rolled out the TFSAs without a great amount of forethought....People could also overcontribute on purpose, pay the penalty, and withdraw the excess to increase their contribution room the following Jan. That was changed, but if things had been properly planned it shouldn't have occurred in the first place.


I'm not so sure the over-contributions indicate much about the forethought. It takes a particular combination to make it work, particularly an investment that is going to a substantial gain in a relatively short period. It may have been more that the few who did had such spectacular gains that it caught the attention of the gov't. 


Cheers


----------



## Koala (Jan 27, 2012)

I don't think it takes a special combination to profit by purposely over-contributing based on the original rules.
Early Jan 2009 - Contribute $15,000
Late Jan 2009 - Withdraw $10,000 (over-contribution)
Pay 1% for that one month = $100
Jan 2010 - Contribute $15,000 (no over-contribution $10,000 withdrawal from 2009 + $5000 new contribution for 2010)

So based on the old rules, they would have increased their TFSA contribution room for the following year by whatever was over-contributed and withdrawn. At the highest tax rate, it wouldn't take to long to benefit above and beyond that initial 1% penalty. The rules just got changed before that extra room existed.
Or am I not understanding the original rules?


----------



## Eclectic12 (Oct 20, 2010)

Koala said:


> I don't think it takes a special combination to profit by purposely over-contributing based on the original rules.
> Early Jan 2009 - Contribute $15,000
> Late Jan 2009 - Withdraw $10,000 (over-contribution)
> Pay 1% for that one month = $100
> ...


If your understanding is correct, I agree that it wasn't thought out. However, I thought that withdrawing the over-contribution did not grant any contribution room the following year.

The example in the paper to explain why the choice between a 1% and 100% penalty was needed & being added:
Jan 2009 - Contribute $100K, which is $5K legitimate and $95K over. Buy a stock
Feb 2009 - Stock has doubled, sell part or all. Withdraw $95K. Pay penalty of 2 x 1% x $95K or approximately $2K.

End result - $95K is in the TFSA tax free for investments or withdrawals at a cost of $2K.


I planned on sticking to the contribution limits so I didn't check out the full details of whether an over-contribution withdrawal could grant following year contribution room. :biggrin:


Cheers


----------

