Changes made for the 2015 tax year include an increase in the allowable TFSA contribution room limit for 2015 and a new minimum withdrawal schedule for RRIFs. Both present new opportunities for retirees, as to managing their unregistered savings and RRIF withdrawals.
Annual TFSA contribution room was increased to $10,000, but now that the Liberals have been elected, it’s likely they will uphold their campaign “promise” of reversing that increase. But right now, the total available contribution room is $41,000 for someone who has never contributed, or $82,000 for a couple. People who have maxed out their contributions can put another $4,500 into their TFSA for 2015. This should be taken advantage of ASAP, as it is likely will change for 2016.
What’s in it for retirees? Firstly, many high net worth people have significant non-registered accounts that produce fully taxable income. Individuals and their spouses who haven’t set up TFSAs yet should transfer as much as possible of it into tax-sheltered investments. For people taking out RRIF income they don’t need, rolling it into a TFSA is a great opportunity to have it grow tax sheltered from that point on.
The 2015 Revised RRIF Withdrawal Schedule: With the new budget the RRIF minimum withdrawal rates has been reduced. For example, for a 71 year old it has gone from 7.38% to 5.28%. This is in response to current low interest rates and increasing longevity. The new withdrawal schedule is based on a 3% rate of return on investments and projected to provide income to age 94. Unfortunately when factoring in inflation, real rates of return with safe investments are negative, so long-lived seniors may still risk running out of money.
Seniors who have withdrawn funds in 2015 based on the old rate can re-contribute the excess RRIF withdrawal back into their RRIF by the end of February 2016 for a deduction on their 2015 tax return. Whether this is worthwhile depends on if the money is needed or if the funds are available to be re-contributed. A discussion with your tax advisor will help determine if there’s any benefit. If the re-contributed funds are subject to the same or a lower tax bracket in the future it may make sense to do so. If re-contributing, the excess amount might have a favourable benefit relating to any OAS claw-back as well as the age credit. If re-contribution does not seem appropriate, investing the excess amount into a TFSA will at least shelter it from further taxation on the income it earns.
One common theme I am running across is that people seem to be investing their TFSA funds in daily interest savings accounts or GICs paying 2% or less. For those who don’t need the money, I feel there are much better investment choice available with significantly higher returns. You can invest in the full range of options that are available with RRSPs and get the best return for your buck while factoring in your investment time line and risk tolerance.
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