Withdrawing money from a TFSA in retirement is one of the best ways to protect retirement benefits that are vulnerable to being clawed back, such as Old Age Security (OAS).
When you earn CPP, or withdraw from an RRSP, the sums that hit your bank account count as income. That might sound strange, given that both represent savings you’ve accumulated over your life (in the case of the CPP, held for you by the government). However, since pension benefits come from both contributions and investment gains, that makes sense. Investment income is income, and it’s the main reason your CPP and, hopefully, RRSP withdrawals are, or will be, greater than the money you put into the accounts.
The amount of money you get from programs like OAS is income-adjusted, clawed back when you earn a certain amount of money. If you earn a really high income in retirement, OAS can be clawed back to the point where you get nothing from the program at all!
You might say that people earning high incomes in retirement don’t need OAS, because they already have a lot of money coming in. For retirees with high expenses, a nominally “high” income is little consolation. In this article, I’ll explore how TFSA investing (especially TFSA withdrawals) can protect your benefits in retirement.
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How TFSA withdrawals work
One of the most unique aspects of the TFSA is that withdrawals from it are tax-free. Despite the fact that you might earn investment gains in a TFSA, those gains are never counted as income. So, you pay no tax on them. This is a unique feature shared by no other savings vehicle in Canada except the first home savings account (FHSA). As a result of this feature, TFSA withdrawals do not cause your OAS to be clawed back – even if the withdrawals are beyond the OAS clawback threshold.
How RRSP withdrawals can trigger clawbacks
Unlike the TFSA, the RRSP can trigger taxable income. This happens whenever you make withdrawals from the account. Even if your marginal tax rate is so low that you shouldn’t theoretically pay any taxes, you still pay withholding taxes on RRSP withdrawals right away. After you file your taxes, you get the money back if your taxable income turns out to be too low to pay taxes on. If you’re making large RRSP withdrawals on the other hand – let’s say $95,000 or more – it’s all taxed as income and can trigger the OAS clawback.
An example of how much you can save
Making RRSP withdrawals can save you a lot on taxes, and help you keep more of your retirement benefits such as OAS.
Let’s imagine that you have $500,000 worth of Fortis (TSX: FTS) stock and are withdrawing the dividends that the stock produces in order to fund your retirement. We’ll also assume that you have other income sources, all of which combined give you a marginal tax rate of 30%.
Now, a $500,000 position in Fortis stock pays about $15,672 per year in dividends, and that amount is likely to rise over time. With the assumptions we’ve been using, you’d pay $4,701.60 in taxes on those dividends if you withdrew them from an RRSP. Also, if you had $80,000 in other taxable income, the dividends would push you to the point where your OAS would start getting clawed back.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Fortis Inc | $83.58 | 5,892 | $0.665 per quarter ($2.66 per year) | $3,918 per quarter ($15,672 per year) | Quarterly |
Now, if you withdrew similar sums from your TFSA, you would pay no taxes at all on them, and you wouldn’t trigger the OAS clawback. The reason for this was discussed previously: TFSA withdrawals aren’t counted as income. So, you can use the TFSA to keep a larger portion of your income than you’d keep in a taxable account or even an RRSP and avoid the OAS clawback. It’s a great environment to invest in.
