The Tax-Free Savings Account (TFSA) is one of the most powerful tools available to Canadian retirees. It offers tax-free growth, flexible withdrawals, and zero tax on income or gains. Despite these benefits, many retirees don’t use their TFSA the right way and end up missing out on long-term savings or even triggering unnecessary taxes.
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Their Situation
Mr. and Mrs. Smith were both 60 years old and had recently entered retirement. They had already started their CPP benefits and converted their RRSPs into RRIFs, which meant they were now required to make minimum withdrawals each year. Their Old Age Security benefits would begin at age 65.
They had done a great job saving, and their cash flow needs were fully covered. Because of this, they were in a strong position to leave money behind for their children and grandchildren. The question was how best to draw down their accounts to reduce taxes and maximize what they could pass on.
The Original Plan
Like many retirees, they were told to keep taxes low early in retirement. That meant withdrawing from their TFSAs first to top up their income, then using their non-registered investments, and finally withdrawing more from their RRIFs later in retirement.
This strategy made their early retirement income simple and tax-efficient. However, it left their highest-tax accounts (like the RRIFs) for later, when withdrawals would be larger and potentially taxed at higher rates.
When we modeled this withdrawal plan, their projected estate after tax was $2.12 million.
A Smarter Strategy
We looked at an alternative: drawing down the higher-tax accounts earlier. In this version of the plan, they still received CPP, OAS, and made the minimum RRIF withdrawals, but they also used their RRIFs to top up income first, then their non-registered investments, and left their TFSAs for last.
This allowed them to reduce the overall taxable value of their RRIFs over time and avoid a large tax bill later in life or at death.
The result:
- Their estate increased to $2.25 million
- That’s an extra $125,000 passed on to their family
Why This Works
TFSAs are one of the most powerful tools for retirees, but they are often used too early.
Here’s why it makes sense to use TFSAs last:
- Withdrawals are tax-free, so they won’t increase your income in later years
- There is no required minimum withdrawal like with RRIFs
- Growth inside the TFSA is also tax-free, so keeping the account growing as long as possible increases your estate
- TFSA balances are not taxed at death
By preserving the TFSA and drawing down RRIFs and non-registered funds first, you lower your future taxable income and allow the most tax-efficient account to grow.
How to Invest Your TFSA in Retirement
Mr. and Mrs. Smith were balanced investors on a risk scale of 1 to 10, they sat around a 5. Since they wouldn’t need to use their TFSAs for many years, we recommended they invest more aggressively within the TFSA.
Instead of holding low-risk assets like GICs or bonds in the TFSA, we suggested:
- Investing the TFSA at a risk level of 7 out of 10
- Reducing the RRIF investments to a 3 out of 10
- Keeping the overall portfolio risk balanced at 5 out of 10
This worked for two reasons:
- They wouldn’t touch the TFSA for 15 to 20 years, so they could ride out market fluctuations
- They needed the RRIF money soon, so it made sense to be more conservative with those funds
Matching investment risk to withdrawal timing allowed them to grow their TFSA tax-free without increasing their overall portfolio risk.
Final Thoughts
The TFSA is an incredible retirement tool but only when used strategically. Many retirees use it too early, missing out on long-term tax savings and investment growth.
By:
- Delaying TFSA withdrawals
- Drawing from taxable and registered accounts first
- Investing the TFSA more aggressively when not needed for income
You can reduce taxes and increase what you leave to your family. In Mr. and Mrs. Smith’s case, this strategy gave them an extra $125,000 in their estate with no extra savings required.
Want to learn how to apply this strategy to your own retirement plan? Go visit our website and book an appointment with us.
