Just as a Tax-Free Savings Account (TFSA) meets a variety of needs during your working years, it can be equally versatile during retirement.

Providing tax-free income

Drawing income without paying tax is already a win, but tax-free income also lends itself to various retirement income strategies.

Perhaps there are years when a mutual fund investor needs more retirement income, and they’re at the upper threshold of a tax bracket. Drawing income from taxable sources would result in paying more tax on that amount, but they could withdraw TFSA funds without climbing to the next bracket.

Say that someone wants to defer their Canada Pension Plan (CPP)/Québec Pension Plan (QPP) and Old Age Security (OAS) benefits to age 70 to gain a larger benefit amount in the long run. The retiree can withdraw tax-free TFSA funds to help cover their cost of living during the years before they take their government benefits.

Some retirees might be in a position where their taxable income amount would result in a clawback of OAS benefits. They can avoid or minimize the clawback by making TFSA withdrawals, as these funds aren’t included as income for tax purposes.

Continuing to invest

If you earn income during retirement from part-time work, a business, consulting or a rental property, you can continue to invest in mutual funds in your TFSA – up to your contribution limit.

Some retirees have years when their minimum required Registered Retirement Income Fund (RRIF) withdrawal leaves them with more income than they need.

By contributing a portion of that withdrawal to their TFSA, the amount can grow tax-free.

Another way to grow a TFSA is by gradually transferring mutual fund investments from a non-registered account. The nonregistered assets are taxable whether they’re sold or transferred in-kind, but they would be subject to tax in the future anyway. With this strategy, you pay any tax owing now and benefit from future tax-free growth and withdrawals.

Leaving assets to heirs

Part of estate planning is managing or accounting for the tax payable on estate assets, but with TFSAs, planning for taxation is not an issue.

If you want to leave your TFSA’s mutual fund assets to your spouse, you can name them as a successor holder or beneficiary. Usually, successor holder is the better choice because your spouse simply takes over the existing TFSA – it’s a simple transaction. If a spouse is named beneficiary, there are rules to follow, a form to submit and potential tax consequences.

If you leave TFSA assets to a child or another heir, you designate them as a beneficiary, and they’ll receive the proceeds tax-free.

A TFSA can also be used to help offset tax payable on estate assets by naming the estate as beneficiary. Also, if you wish to donate your TFSA’s mutual fund assets to a charity, the donation tax credit can be used to help offset an estate’s tax liability.

Note that in Québec, a beneficiary or successor holder can only be named on the TFSA form for insurance investment products, such as guaranteed investment funds or segregated funds. Otherwise, the TFSA beneficiary is to be named in the will.