Withdrawing money from a TFSA in retirement
With a TFSA, though, you can withdraw money and put it back in the next year. You cannot do that with a RRIF. Once you withdraw money from it, you can’t put it back in.
If you think you will need a tax sheltered account for a large sum of money in the not too distant future, for, say, a house sale or inheritance, it may be best not to use a RRIF to top up the 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 qualify for the $2,000 pension tax credit. Plus, which may be more important to you, you will be able to control the withholding tax on your minimum RRIF withdrawals. As a reminder, with RRSP withdrawals, the withholding tax on the first $5,000 is 10%, between $5,000 and $15,000 it is 20%, and over $15,000 it is 30%.
Converting your RRSP to a RRIF means no withholding tax on the minimum withdrawal after the first calendar year of opening the account, unless requested. I’ve heard it said that it doesn’t matter if the withholding taxes are high because you will get the money back in the form of a tax refund when you complete your taxes in the spring. But, having too much withholding tax means drawing more than needed from your RRSP investments, pushing up your average tax rate, and possibly losing some future investment growth.
You 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 a RRSP and you free up TFSA room, which you can use to absorb some of the proceeds from a home sale or inheritance.
But there is one issue.
Drawing $10,000 from a TFSA, adding it to a RRSP, and then withdrawing the money will leave you with $10,000 minus the tax.
You just turned $10,000 into a smaller amount. You may think that the RRSP tax refund will make it even, but it won’t. If your marginal tax rate is 20% and you make a $10,000 RRSP contribution, your tax refund will be $2,000. Sounds good, but how much did you have to earn before tax to have the original $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 go from a TFSA to an RRSP, you could use the $10,000, borrow $2,500 and when you get your tax deduction of $2,500 pay back the loan.
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