Your retirement savings are a crucial aspect of your financial well-being. It becomes your primary source of income. If you come to know that the Canada Revenue Agency (CRA) is taking a big tax bite off your retirement savings, it could force you to work past retirement and live frugally. Many people plan their investments well and build up a sizeable retirement pool but fail to consider the tax implications. The outcome is a large portion of the savings going to tax payments and all your plans going down the drain.
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How to protect your retirement savings from the CRA
It is important to consider the tax implications while planning your investments so that you can retain most of your investment income. The CRA has several tax planning tools that you can use, with the Tax-Free Savings Account (TFSA) being the most tax-efficient. However, you have to be careful while using the TFSA, as it has its rules.
Every year, the CRA sets a TFSA contribution limit, and the unused portion keeps accumulating in the contribution room. If you were 18 or older in 2009 and never contributed to a TFSA, your cumulative contribution room could be up to $102,000 in 2025. If you withdraw some amount from your TFSA in 2024, the withdrawal amount is added back to the contribution room in 2025.
Make the most of this contribution room because if your $10,000 becomes $110,000 in 15 years, which has happened with those who invested in Constellation Software (TSX: CSU), the $100,000 capital gain is tax-free. Do not exceed the TFSA contribution room, or the surplus amount will be taxable.
Since you do not report the TFSA withdrawals in your taxable income, it does not reduce your Old Age Security (OAS) pension and Guaranteed Income Supplement (GIS) you may be eligible for after age 65. These benefits are reduced if your taxable income exceeds their income threshold requirement. For 2025, the OAS income threshold for ages 65-74 is a 2023 annual net world income of $142,609 or less.
How to plan your retirement savings
The first step is to max out your TFSA contribution room because no other account gives you the tax benefit TFSA does. Consider investing in high growth and dividend growth stocks, as they can generate higher investment income.
If you are saving up for your first home in a Registered Retirement Savings Plan (RRSP), consider switching to the First Home Savings Account (FHSA). The FHSA allows you to deduct the contributions from your taxable income and withdraw the amount tax-free to make a down payment for your first home. In the RRSP Home Buyers Plan, you have to repay the withdrawn amount in 15 years or add the balance to the taxable income, which is not the case with FHSA.
Constellation Software is a good growth stock to buy and hold in TFSA and FHSA. It has been generating a compounded annual growth rate (CAGR) of 20% that could double your money in five years. The company’s business model is resilient as it grows through acquisitions. Even if the stock gives subdued returns in a year, it bounces back with accelerated returns next year. It has a strong balance sheet and a regular cash flow, which it uses to fund new acquisitions.
The higher the house downpayment, the lower the mortgage requirement and the faster the repayment. It could help you retire debt-free.
Investor tips
You could consider investing a small portion in RRSP. Within this account, consider buying dividend stocks, as withdrawals are taxable. The only advantage of RRSP is you claim tax advantage today. Your Canada Pension Plan and OAS could provide a third of your daily expenses, and TFSA passive income could provide another one-third. The remaining one-third could be funded from RRSP passive income or side gigs you take up after retirement.
Consider using the TFSA for emergencies, recreation, surplus expenses, and other bigger expenses. This way, your higher withdrawals will not attract higher tax bills.
