Thoughts on RIFs and TFSAs

First, an overview. I have a RIF. Each January I move the mandatory withdrawal as an in-kind transfer from my RIF to my TFSA and, if I run out of contribution room in my TFSA, I move any remaining funds to a non-registered self-directed account.

The contribution room in a TFSA is the sum of the annual contribution room plus the total amount of withdrawals made in previous years and that have not been replaced.

My TFSA is filled with good, solid, dividend-paying stocks. I withdraw the dividends to live in retirement and I replace that withdrawn dividend cash the following year with dividend paying stock of equal value.

The contribution room in my TFSA is not large enough to hold the entire in-kind RIF mandatory withdrawal. I transfer the remainder to my unregistered self directed account. I also remove the dividend cash from this account to live in retirement. As this is dividend income from Canadian companies, the tax is paid at the reduced dividend tax rate.

Some of the stocks in these accounts are paying a very handsome dividend. For instance, my HR.UN REIT pays 6.31% today. Click the link to discover what it is paying today. Another, EMA, is paying 5.15%. Each year, the amount of stock grows and the dividend income increases.

Stuff to watch:

• Annual minimum withdrawal amount from your RIF. Make sure you withdraw enough.
• If it's a LIF, you must know both the minimum withdrawal demanded and the maximum withdrawal ceiling. Do not withdraw more than allowed.
• Keep your own TFSA records. I find my records are more up-to-date that the government ones, at least early in the year. Check the TFSA contribution room very carefully. Do not over-contribute to your TFSA.

Overall view of RIFs
Receiving income from RIFs
Making or replacing withdrawals from a TFSA

Something to note: there is no withholding tax on minimum withdrawals from RIFS but, and it is a big but, you must pay tax in the following year. For this reason, when I remove the dividend cash to live, I tell the bank to withhold 30% for income tax. This amount is large enough, at the moment, to cover both the tax bill on the in-kind withdrawal and the tax on the cash withdrawal.

My hope is that I can shrink my RIF fast enough to prevent the increasing withdrawal percentage from forcing me to part with some of my stock.

One last caveat: take care not to have too much income and trigger the old age security clawback. For info on this see: Old Age Security pension recovery tax.

If you are familiar with how a spreadsheet works, I have found setting up a spreadsheet makes tackling all of this quite easy. My TFSA contribution room numbers are always up-to-date and trustworthy. I've found the government TFSA contribution room estimates are about a year behind in January. If I went blindly by the number issued early in the year by the government, I'd be in big trouble. When you understand how the number was calculated by the government, the reason for the problems will be clear.