The TFSA Balance You'll Probably Need to Retire Well in Canada

The TFSA Balance You’ll Probably Need to Retire Well in Canada

Explore how to retire wisely with a Tax-Free Savings Plan for a less taxable retirement and maximize your income.

Puja Tayal

Author Bio

Puja Tayal grew up in a small-business family where dinner conversations often centred on working capital and savings. Her early experiences with investing, particularly during the 2008 financial crisis, shaped her approach to understanding markets and evaluating investment opportunities. She began her career at a mutual fund company before moving into investor education and financial writing for asset and wealth management firms. Before joining The Motley Fool, Puja wrote for Market Realist, where she extensively covered the semiconductor industry. Her published work has also appeared in The Indian Express. Puja believes every stock has a story that can help investors understand its potential returns. She combines business analysis with different investing approaches to help investors make informed decisions and align their portfolios with their long-term financial goals. Outside of finance, Puja enjoys long drives, catching up with friends, watching superhero and science-fiction movies, and managing her family portfolio. She also has a keen interest in artificial intelligence and its potential to reshape the world.

Education

Bachelor's degree in Accounting and Finance, University of Mumbai (2007)
CFA Level I

Areas of Expertise

Qualitative company analysis, management strategy, risk assessment, long-term investing, portfolio diversification and rebalancing, dividend reinvestment, cyclical growth opportunities, compounding strategies, growth stocks, and dividend stocks.

Social Media Profiles

Favorite Investment Quote

"Risk comes from not knowing what you're doing." — Warren Buffett

Published April 30, 9:15 pm EDT

Retirement is often associated with a Registered Retirement Savings Plan (RRSP). However, a Tax-Free Savings Plan (TFSA) is an ideal savings tool if you want your retirement to be less taxable. The TFSA allows you to withdraw any amount tax-free, which means even if you withdraw $40,000 (if you have that amount in a TFSA), you don’t have to report it as taxable income. This helps you earn the maximum Old Age Security (OAS) pension and avoid OAS clawback due to taxable income being above the specified threshold.

a man relaxes with his feet on a pile of books — Source: Getty Images

The benefits of a TFSA when you retire

The beauty of a TFSA is that there is no expiry date, like with an RRSP (it closes at age 71, and your entire balance is taxable). For those who don’t plan to retire, a TFSA is an ideal option. Another good aspect of a TFSA is that all investment income – interest, dividends, or capital gains – can grow tax-free.

So, if you rebalance or reinvest within the TFSA, no tax is triggered. This benefit can save you thousands of dollars in taxes. Here’s how.

Suppose you invested $10,000 in Shopify (TSX: SHOP) in the 2022 tech stock meltdown at $40.50 per share. You would own 245 shares, which are now worth $40,900, a capital gain of $30,900. You decide to rebalance by selling shares worth your gains and reinvesting that amount in SmartCentres REIT. In a normal account, 50% of your capital gain, which is $15,450, will be taxable. If you are in a 20.5% tax bracket, you pay $3,167 ($15,450 x 20.5%) tax on rebalancing. This is free in the TFSA.

From the tax savings alone, you can buy 112 shares of SmartCentres REIT at $28.23 per unit and earn $207.70 in annual dividends. Every penny saved is a dividend earned.

Why is a TFSA better than an RRSP for certain retirement needs

While it is established that a TFSA gives many tax benefits after retirement, an RRSP gives tax benefits before retirement. It is more of a tax planning account, as RRSP contributions are deducted from taxable income. When you retire, your RRSP has to be shifted to a Registered Retirement Income Fund (RRIF) to avoid being taxed on the entire RRSP balance. The RRIF determines a minimum withdrawal amount, and you can withdraw above it. These withdrawals are taxable.

In the above case, Shopify increased the amount fourfold, which more than offsets the tax savings from the same amount invested in an RRSP in the same stock. Suppose you are in the 26% tax bracket, you will save $2,600 in taxes on the $10,000 investment. The five-year return is $40,900, which, if you want to withdraw, will incur $10,270 in taxes. If you withdraw from an RRSP, you will also have to re-contribute that amount in 15 years.

RRSP Withdrawal	Tax Rate	Tax Amount
$0 to $5,000	10%	$500
$5,001 to $15,000	20%	$2,000
$15,001 and above	30%	$7,770
Tota tax on withdrawing $40,900		$10,270

Depending on your current taxes and retirement goals, you can allocate funds between a TFSA and RRSP. In either case, make sure to first max out TFSA contributions before investing in an RRSP. High-growth stocks could earn you tax-free investment earnings that can pay for the tax saved from an RRSP.

The TFSA balance you’ll probably need to retire well in Canada

Considering the benefits the TFSA offers, you are better off making the most of it. Coming to the question of how much TFSA balance you need to retire. There is a 4% withdrawal rule, which says you should withdraw 4% of your retirement savings annually. So, if you want $70,000 annually, $20,000 could come from OAS and Canada Pension Plan payouts.

Average CPP payout	$11,104.20
OAS payout	$8,916.60
Total	$20,020.80

For a $50,000 annual payment, you need a $1.25 million TFSA balance, as 4% of $1.25 million is $50,000. Maxing out on TFSA contributions and investing in stocks that can give a minimum of 10% annual return can help you achieve this goal in 20 years. However, the amount needed will increase in 20 years. You can review your TFSA balance and requirements annually and revise your investments. Ballard Power Systems and Celestica are some ideal stocks for your TFSA.