Q. I have 95% of my investments in RRSPs, and do not have new money to contribute to TFSAs. Does it make sense to withdraw $5,500 each year and move it over to a TFSA? I am 52 years old and have $200,000 in RRSPs and $5,000 in TFSAs. My wish would be to move as much as I can per year to catch up to the maximum I’m able to hold in TFSAs (since 2009). I realize the tax implications so perhaps the best thing to do is always withdraw under $5,000 to pay only 10% tax? Is this the best way? I appreciate any response.
A. Alexis, this is a tax question so your annual income is important to consider when making a final decision. Let’s consider some scenarios.
Of course, if you have no income, or you’re receiving a tax-free disability income, this is an easy question. You should draw enough from your TFSA each year so that at age 65 all of your money is out of RRSPs and into a TFSA and if necessary a non-registered account. This way you’ll be able to collect the Guaranteed Income Supplement (GIS) if your only income is CPP, OAS, and TFSA withdrawals.
There’s a slight advantage to keeping your withdrawals under $5,000 because, as you correctly pointed out, there’s less withholding tax and therefore more money to invest in the TFSA. Just remember though, when you do your taxes you may find that you owe a little more in tax than was withheld at the time of the withdrawal.
Let’s make this a little more interesting and assume you have an income. I’ve assumed you earn $60,000/yr. or $48,000 after tax, and your after-tax retirement income is $40,000. With this solution, you would get about a year and a half in extra income if you gradually move your money from your RRSP to your TFSA before you turn 65. You’ll also pay less tax over your lifetime and you’ll receive more income from the GIS. In this case, it works.
I ran another solution and I assumed you have a pension of $20,000/year and your after-tax retirement income is $48,000/yr. In this case, there is virtually no difference between keeping the RRSP as it is or gradually moving money from your RRSP to your TFSA. With no difference I would suggest keeping your RRSP as you will accumulate more money than you will by withdrawing from an RRSP, paying tax, and then investing in a TFSA.
I hope I’ve given you enough to go on, Alexis, and I haven’t caused confusion. Generally, I find that if you’re single it’s best to leave your RRSP, couples should draw the RRSP early, and if you want to leave a larger estate draw the RRSP first. This is one question that really needs to be modeled. Everyone is different! It is not always best to draw on an RRSP/RRIF first and it is not always best to leave RRSPs/RRIFs until you have used all of your other money. There isn’t a golden rule on this one.
Allan Norman, M.Sc., CFP, CIM, Atlantis Financial/IPC Investment Corp
**This commentary is provided as a general source of information and is intended for Canadian residents only. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation.
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