Making TFSA Contributions After Retirement

We have found the Tax Free Savings Account (TFSA) to be an excellent savings device, since any growth or income you earn within that account is tax-free, even upon withdrawal. This is in contrast to the RRSP which is just a tax deferral mechanism. Once you convert the RRSP into a Registered Retirement Income Fund (RRIF) and start taking income payments, that money is taxed at the full employment income rate.

Having tax-free money to spend will help to reduce our total taxable income in the later years, when we will be forced to take a larger and larger payments from our RRIF.  This year, for the first time since its inception, the TFSA limit has been raised from $5000 to $5500.

Even though we are now retired, we will still try to max out our TFSA contribution every year and have considered various options for accumulating the money to do so. Our current thought is to take the minimum payment that we are obligated to withdraw from our RRIFs each year and use that money for the TFSA contribution.  In effect, we are moving funds from the RRIF, which is taxed on withdrawal to the TFSA which will be tax-free.  If it turns out that we need some of this money to spend during the year, then we can still withdraw from the TFSA tax-free, and will try to recontribute that amount in a future year.  Note that we cannot recontribute in the same year or we will trigger a penalty.

We looked into transferring stock in-kind from our non-registered account as a way to make our TFSA contribution.  We discounted this option because of the potential capital gains that it might trigger, which would drive up our taxable income.  Since we are forced by law to take a minimum RRIF payment anyways, this is taxable income that is unavoidable.