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(George Doyle/George Doyle)
(George Doyle/George Doyle)

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I'm retiring. Should I transfer RRSP funds into a TFSA? Add to ...

Dear Nancy;

I just turned 65 and will retire. I have enough in my RRSP (invested in dividend funds) to give me $1,200 per month, but every time I deregister that amount I will pay a fee to the broker plus tax on it. Also, when I turn 71 and have to transfer it to a RRIF, I will have to cash in a sizeable sum each year, which will put me in a higher tax bracket. Should I open a TFSA for myself and my wife and take out $20,000 or $30,000 each year and buy back into the same dividend funds but hold it in the TFSA? Then I can take the dividends out tax free each month and it will also lower the amount I will convert to a RRIF at 71? I would appreciate your advice if this is a good thing or not. Regards, Ken

I'm retiring. Should I transfer RRSP funds into a TFSA?

Dear Ken,

You are on the right track of thinking. Planning ahead to take out money to reduce your RRSP for when you have to change it into a RIF is a good idea. Remember as of 2012 you can only contribute $5,000 into the TFSA. If you don’t already have one, you can put in the past allowance amount, for a total of $20,000 for 2012. If you deregister funds you can take them out in kind, and then use the cash to pay the necessary withholding tax and applicable fees. The withholding tax may not be entirely lost because you declare the deducted amount on your income tax return. It’s basically being taxed at source.

You haven’t disclosed the size of your RSPs nor your income level, so I have to make some assumptions. If you’re in a tax bracket lower than the highest, then it may make sense to take out the $20,000 to $30,000 amount you mention. Try to stay in the lower tax bracket. Transferring the dividend income to either the TFSA or an investment account is a good strategy. With the TFSA all the future income and growth are tax sheltered.

When held in the investment account, if the dividend income is from a Canadian source the tax credit is a benefit. You can receive in excess of $50,000 of dividend income if you have no other income and not pay tax. (The amount varies from province to province. Nova Scotia, Quebec and Prince Edward Island have lower eligible levels).

So, once you have maxed out the allowable contribution for the TFSA, there is still a benefit to having dividend income in an investment account. If it remains in the RSP or RIF, the dividend is deregistered and taxed 100 per cent as regular income. Interest income is best inside a RSP, RIF or TFSA, income from U.S. sources are best inside an RSP or RIF, dividend income from a Canadian source is best in the TFSA and then an investment account.

Many are unaware that income from U.S. sources are not subject to non-residency withholding taxes if held in accounts deemed for retirement purposes. In the case of the TFSA it is not deemed as used specifically for retirement, so there is a non-resident withholding tax.

Careful planning where investments are held can enhance your after-tax results. Consider contacting a tax professional to ensure you are using the best solution.

Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com


For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season website for daily updates.

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