TFSA Master Class – Lesson 5: Using a TFSA to live larger, and be taxed smaller – later in your career

Have you started the countdown to retirement? Maybe you’ve recently retired? Perhaps you’ve already been enjoying life after school for some time now.

Wherever you are on the retirement spectrum, you most likely have been giving serious thought about how you plan on spending the next chapter in your life—and more importantly, how you plan on funding it.

While Lesson 4 spoke to time being on the side of educators who are early in their career (when it comes to using a Tax-Free Savings Account to build a nest egg over and above their pension income in retirement), rest assured seasoned and retired educators that it’s never too late to get your own financial ducks in a row. That’s where a TFSA can be quite the versatile investment tool, even if you’re well into your career and beyond.

For the educator who is approaching retirement, profit from that mortgage payment discipline.

If you have recently paid off your home, congratulations on being mortgage-free! Now reallocate those previous mortgage payments to your Tax-Free Savings Account. It’s a simple, yet very effective savings strategy.

For example, let’s say Sarah Jane, now 52 years of age, had monthly mortgage payments of $1,200. Her last mortgage payment came out in December, so she arranged to start automatic monthly contributions of just $500 to her TFSA in January (($7,000 is the maximum contribution limit for the year. However, if she hasn’t contributed the maximum in prior years, she isn’t just restricted to the $7,000, Sarah Jane could use up the remaining accumulated contribution room), Sarah Jane could look forward to building a nice chunk of money in her TFSA—withdrawals from which would be tax-free income.

Based on the above contributions of $500/month, here’s the potential value of Sarah Jane’s TFSA over the next 5 to 20 years, assuming an estimated annual rate of return of 5%:

Depending on Sarah Jane’s goals in retirement, she can plan to eventually tap into her TFSA for travel, leisure, estate building, or even long-term care, depending on her health situation later in life.

Saving for the possibility of long-term care should be top of mind for all retirees, because according to the Council on Aging, more than 40% of Canadians over 65 years of age will at some point require care in a long-term facility for the last three to four years of their life. The funds accumulated in a Tax-Free Savings Account can provide you with the extra financial peace of mind when it comes to funding long-term for those of you whose heath benefits stop at retirement.

How much will you need to cover the costs of a long-term care facility? Check out the top 5 financial details you need to take care of ASAP.

Test-drive your financial life in retirement in order to put away additional funds into your TFSA.

In addition to reallocating a portion of your previous mortgage payment to a TFSA—or if you are still making mortgage payments late in your career and are looking for another way to put money away, Educators Vice President, Client Advisory Services, Karen Hubbard suggests trying to live off your pension amount while you’re still working. “Not only will this give you a dry run at retirement realities,” says Karen, “but it will allow you to funnel that excess income into your TFSA to build up additional funds for down the road. It’s an exercise we like to suggest to educators approaching retirement because it’s a good way to be enlightened to the financial realities of living in retirement.”

For retired educators, withdraw from your RRSPs before age 71 to minimize tax implications.

The government will require that you convert your RRSP to a RRIF by age 71 and that you start taking income from it (even if you don’t need the extra income). Redemptions from your RRSP or RRIF get added to your pension. Then tack on CPP and OAS and you’re almost at the same tax bracket as when you were working.

A strategy that we use with our clients is to gradually redeem from your RRSP before age 71.

“Think of your retirement income as a stepping stone,” says Educators Certified Financial Planner professional Lisa Raponi. “The first step is from age 59 (the average retirement age of educators according to OTPP) until 65 (when you start collecting government pensions); then from age 65 until 71 (the age you are forced to convert your RRSP to a RRIF); and finally, age 71 and beyond. By taking control of your retirement income through each of these stepping stones, you can minimize your taxes and maximize your income when YOU decide, not when the government decides.”

If you don’t need the income, this strategy may still be for you. You can always redeposit the RRSP withdrawals to your TFSA (within the specified annual limits). This will ‘unlock’ funds for future needs such as travelling or renovations. Plus the TFSA has no expiry date, so you control when, and how much you want to use from it. It’s a win-win situation.

Reminder for retirees: don’t forget to designate a ‘successor holder’.

Finally, as we stated in Lesson 3, be sure to appoint your spouse or common law partner as ‘successor holder’ to your TFSA upon your death to protect your tax-free assets. If there is no spouse or common law partner, then naming a designated beneficiary will help to ensure the assets you worked so hard to build within your TFSA are passed on in the most tax-effective manner after you pass away.

When in doubt about your TFSA, educator-specific advice is just a call or click away.

With over 45 years of working exclusively with members of the education community, we have a very good idea of what your financial life will be like in retirement. So if you’re looking for advice on how to make a Tax-Free Savings Account work for you in your golden years, reach out to one of our financial specialists. We’re here to help you develop an investment plan that provides you with peace of mind so you can enjoy your retirement years, worry-free.

Have one of our financial specialists contact you to maximize your TFSA for retirement. Plus check out The Learning Centre to enhance your financial literacy on a wide range of other topics.

*Calculated using a compound interest calculator and assumes a starting TFSA balance of $0 and that the 5% annual rate of return (compounded annually) remains constant over the duration. The rate of return is used only to illustrate the effects of the compounded growth rate and is not intended to reflect future values, or returns. Commissions, trailing commissions, management fees and expenses may all be associated with mutual funds. Mutual funds are not guaranteed, as their values change frequently and past performance may not be repeated. Please read the prospectus before investing.