Withdraw from RRSP for TFSA?

Question: We are both 66 and retired. We have income of $18,000 each from CPP + UK + OAS. Will we pay income tax? We have RRSP mutual funds. We have thought of cashing in $5,000 each every year, paying the tax, and putting what is left in a Tax-Free Savings Account. Is this more beneficial than waiting until we are 71 and having to cash in a set amount? – Derick A.

Gordon Pape answers: It is possible you may have to pay some tax this year but it won’t be much. The basic personal amount for the 2012 tax year was $10,822 so that much of your income is tax exempt. You both should also be able to claim the age amount, which was worth $6,720 each last year. That brings your total exempt income to $17,542. It’s possible that some of your British pension income might qualify for the pension income tax credit as well (OAS and CPP are not eligible). Even if you have no other credits, your taxable income will be little or nothing.

If you add $5,000 each from RRSPs to that amount, most or all of it could be taxable. Depending on your province of residence, the marginal rate will be between 20% and 25%. If you don’t have additional credits available to shelter that money (e.g. disability, medical expenses) you should think carefully before withdrawing it if you don’t need it to live on. You’ll end up paying thousands of dollars to the government before you need to, money which could continue to earn a tax-sheltered return inside the RRSP.