You’ve finally made it. After years of saving, planning, and simply waiting, the date arrives when you can finally retire. However, before the celebrations begin, many investors might be met with a few surprises. In fact, some involve tax traps for new retirees that can make a serious dent in income.
Today, let’s discuss those tax traps, how to avoid them, and how to use your Tax-Free Savings Account (TFSA) and a low-cost exchange-traded fund (ETF) to reduce the burden.
OAS clawback
The first trap? The Old Age Security (OAS) clawback. OAS is income-tested; therefore, once your net income passes the clawback threshold, every dollar reduces OAS by $0.15 until it’s fully clawed back! As of writing in 2025, the clawback threshold begins at $90,997. So for higher-income retirees, this can turn a source of income into a hidden tax on your income.
Plus, unlike the Canada Pension Plan (CPP), it’s not based on contributions. Therefore, clawing it back feels like losing money you’ve already earned! But don’t worry! There is a way to help with the sting. First off, invest in your Registered Retirement Savings Plan (RRSP). For every dollar you invest, this brings your taxable income down for the tax year. Therefore, you could bring yourself down to a lower tax bracket and bring down your clawbacks.
Furthermore, you can mitigate the risk with TFSA dividends. The TFSA doesn’t count as income for tax or OAS purposes. So, any cash coming your way, you can enjoy fully. Combined with your RRSP, you could be looking at far more income in retirement by investing early and often!
RRIF withdrawal
Then there’s the Registered Retirement Income Fund (RRIF) and withdrawal on taxation. All that money you put into your RRSP to bring down your taxes is being taxed when you withdraw it. At age 71, the RRSP must convert to a RRIF, with mandatory minimum withdrawals starting the next year. These are fully taxable as income, pushing you perhaps into a higher tax bracket and even triggering that OAS clawback.
So, even though you might not need the income, you’re forced to take it out and are taxed to do it! However, there’s a way to ease that burden. And again, it comes down to the TFSA. Investors can put that cash into a TFSA if they don’t need it and invest it in a safe exchange-traded fund (ETF) like iShares Core Equity ETF (TSX:VEQT). This is a low-cost, globally diversified, all-equity ETF that’s perfect for retirees.
With a management expense ratio of just 0.20% and about 8,500 holdings, investors get growth and distributions — all without taxes dragging you down. A great option would be to withdraw gradually at 71 to smooth out taxable income, popping it into your TFSA to lock in future tax-free income as well.
Bottom line
These tax traps can sting if you’re not prepared. But if retirees just do a little bit of prep work and ideally hold off until 70, much of that sting can be soothed quickly. The key? Investing in a TFSA to keep taxes down and income up.
