Can you retire using just your TFSA?

At Cashflows & Portfolios, we believe the opportunity for Canadians to save and invest tax-free over decades could be considered one of the greatest wonders of our modern financial world.

This begs an important question below.

If you start investing early enough, we wondered: Can you retire using just your TFSA?

We believe so and in today’s updated post with updated inflation data we’ll show you how that can happen as early as age 55!

Can you retire using just your TFSA? Why the TFSA is a gift for all Canadians!

Our Canadian government introduced TFSAs in 2009 as a way to encourage people to save money. Looking back, it was one of the best incentives ever created for Canadian savers…

Our Canada Revenue Agency has a HUGE library of TFSA links and resources to check out but we’ll help you cut to the chase along answering that leading question above:

Can you retire using just your TFSA?

Why the TFSA is just so good

Since the TFSA was introduced, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before. While the TFSA is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to your TFSA are with after-tax dollars and withdrawals are tax-free. You can carry forward any unused contributions from year to year. There is no lifetime contribution limit.

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account.  This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Here is a summary of many great TFSA benefits:

• Capital gains and other investment income earned inside a TFSA are not taxed.
• Withdrawals from the account are tax-free.
• Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits (such as Old Age Security (OAS)). This is very important!!
• Anything you withdraw from your TFSA can be re-contributed in the following year, in addition to that year’s contribution limit, although we don’t recommend that. More in a bit.
• While you cannot contribute directly as you could with an RRSP, you can give your spouse or common-law partner money to put into their TFSA.
• TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. This makes the TFSA an outstanding estate management account – leaving TFSA assets “until the end” can be very tax-smart.

Since you paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out. This feature combined with the ability to compound money, tax-free, over decades, can make the TFSA one of the best ways to build wealth for retirement.

RRSP vs. TFSA – which one is better?

There is no shortage of blog posts that highlight this debate and one of our favourites is from My Own Advisor. :)

You can check out his post here. 

Without stealing too much of MOA’s thunder, the RRSP vs. TFSA debate essentially comes down to this: managing the RRSP-generated refund.

In many cases, we believe the TFSA wins over the RRSP as an investment account:

TFSA vs. RRSP – Why the TFSA wins

Let’s dive deeper with a quick example.

Contributions to the RRSP are excellent because the contribution you make today lowers your taxable income – and you may get a tax refund because of it – a pretty nice formula. The problem is, some Canadians might spend the RRSP-generated refund from their contribution. You’ll see why this is a major problem.

Consider working in the higher 40% tax bracket whereby RRSP contributions to lower your taxable income make great sense:

• If you put $300 per month into the RRSP for the year, that’s a nice $3,600 contribution.
• You’ll get a $1,440 refund (40% of $3,600).

When your $1,440 RRSP-generated refund comes in, and now you decide to spend it on a new iPhone, just know that your RRSP refund is effectively borrowed government money. Yup, a long-term loan from the government they are going to come back for. If you always spend your refund you are undermining the effectiveness of RRSPs because you are giving up your government loan that would otherwise be used for tax-deferred growth.  A refund associated with your RRSP contribution should not be considered a financial windfall but the present value of future tax payment you must make.

If you typically spend the RRSP-generated tax refund in our example then we think some Canadians are FAR better off prioritizing your TFSA over your RRSP because of the known benefits of that present-day contribution.  

TFSAs offer tax-free growth for any income earner

At some point, the money that comes out of your RRSP (or Registered Retirement Income Fund (RRIF)) will be taxed.

With TFSAs, the government has eliminated the guesswork about taxation. The TFSA is like the RRSP, but in reverse: you don’t get any tax break on the TFSA contribution but all TFSA withdrawals are tax-free. This is essential for later-in-life spending that we’ll highlight below.

For far more details including answering dozens of questions about this account, read on about our comprehensive TFSA post below:

Everything you need to know abou the TFSA and TFSA contribution room here. 

If you haven’t contributed much towards your retirement and/or you can’t possibly save enough with so many competing financial priorities – that’s OK – striving to max out your TFSA contributions each year, every year, is still very valuable and admirable goal. In fact, focusing diligently on just maxing out your TFSA (and ignoring the RRSP account entirely) will still serve your retirement plan well.

Regardless of your income, any Canadian who is 18 years of age or older with a valid social insurance number (SIN) can open a TFSA. All you need to do is reach out to a financial institution, credit union or insurance company that offers TFSAs and open an account.

Whether you set up your automatic savings plan to your TFSA weekly, monthly, or other – striving to make the maximum contributions to this account can be a significant wealth-building tool as part of the Four Keys to Investing Success. 

Let’s use a case study to demonstrate just how good this account can be for you too – and why you can retire just using your TFSA!

Can you retire using just your TFSA – A Case Study

The big question in his article is – given enough time (ie. if you start young enough), can someone retire using only their TFSA?  The answer may surprise you, at least it surprised us!

To help accurately model this scenario to account for government benefits, inflation, taxes, tax credits, and optimized withdrawal schedules, we dove into the software that we are using to manage our own early retirement plans.

Here are the long list of assumptions we made:

• Our young couple has recently finished post-secondary studies and has been working for a few years.
• This couple is age 28 (in 2024) and is now common-law.
• Our 28-year-olds are making on average about $75,000 per year, each.
• We’ve assumed their salaries will rise by about 3% inflation over time.
• Since they read Cashflows & Portfolios and they have already followed Mark’s 15-year+ investment journey on My Own Advisor they know saving early and saving often, using the TFSA, will be their key for a wealthy retirement decades from now…
• Each partner only has $10,000 in each of their TFSAs as a starting point…they want to know what their future might look like from this post!
• Our couple has no other savings. They rent and they intend to rent for many years on end.
• There is no Group RRSP at work. There is no workplace pension plan. They must save and invest on their own.
• They are generally pretty frugal. They can easily save more than $10,000 per year right now but who knows what the future holds. They may want a family eventually so we’ll assume they only max out their TFSAs for the coming decades.
• Since they were both born in Canada from immigrant parents, they will eventually qualify for full OAS when they turn age 65.
• While they enjoy their full-time jobs, now, they can’t imagine themselves working full-time until their 60s or 70s. **They figure they will stop full-time work at age 55 and then move into hobby work/part-time work from ages 55-65 making on average, just $15,000 per year each.

**They enjoyed My Own Advisor’s recent post about the opportunity to be Coast FIRE or pursuing Barista FIRE.

Weekend Reading – Are we Coast FIRE now?

• Since neither partner intends to work full-time past age 55, they won’t get full CPP benefits when they turn age 65. We’ll assume they get max 75% CPP benefts at age 65.
• Later in life, we’ve assumed a modest inheritance of $100,000 each as a future value at age 70. The inheritance could be much larger but we don’t want to assume too much for something that may or may not be accurate some 40+ years into the future….
• Finally, when it comes to rates of return and inflation, we’ll also be conservative. We’ll assume 3% sustained inflation and 6% long-term equity rates of return. 

For our case study today, our young couple is now student loan/debt-free, own a newer car, rent with ease managed to put a few dollars in their TFSA for long-term compounding.

Let’s take a look at the results!

Can you retire using just your TFSA?

Making $75,000 today as a salary with 3% inflation will definitely help fund their TFSA; our couple has excess cashflow beyond TFSA contributions. As such, even if they decide to start a family in a few years, ignoring the RRSP, RESP and other accounts whereby cashflow might be needed to raise a family, our couple is going to be just fine.

Inflation can be a wealth killer. So, best use realistic and some pessimistic assumptions for long-run case studies.

With 3% inflation projected, spending any desired $72,000 per year or $6,000 per month after-tax in the “go-go” years of retirement until age 75 is going to feel like spending a whopping $160,000 per year at age 55.

Even still, it is possible to semi-retire at age 55 by only maxing out your TFSA diligently for decades on end.

Here is the cashflow projected from their portfolio:

Source: Cashflows & Portfolios work. 

After age 75, many years from now, inflation-adjusted spending will be ~ $240,000 per year.

Our couple has $20,000 invested today.

Thanks to maxing out their TFSAs over the coming 25+ years those TFSAs mushroom to be worth $1.3 million in value when they decide to move to Barista-FIRE mode at age 55 and work part-time.

Those TFSA assets support them as they work part-time before other dependable, inflation-protected income streams like CPP and OAS come online later on in life.

Here is the financial assets chart over time:

Source: Cashflows & Portfolios work.

Can you retire using just your TFSA summary

At Cashflows & Portfolios, we’re not suggesting to use the TFSA over the RRSP exclusively. I mean, both accounts have great merits so you use both if you can!

Joe is now semi-retired, raising two kids with his wife, in his mid-40s thanks to using both the TFSA and RRSP accounts diligently over the years, along with making other very smart financial decisions.

By using both the TFSA and RRSP for investing, Mark is also on his semi-retirement way…

What we are suggesting however is if you had to pick just one account, and focus on that, since you need to manage your cashflow for other things in life – like raising a family, enjoying work-life balance, or other – we believe always maxing out the TFSA for any individual or couple can still yield great retirement results.

As always take some time to look at your financial situation and try and figure out what works best for you. That includes asking us any questions along the way! We answer every reader email and comment on this site as much as we can to help all DIY investors at any life stage.

Need any support with your retirement income projections?

Knowing how to save and invest wisely, to help you get the most out of your portfolio, is something we can help with. We’ve been there!

In addition to that asset accumulation work using the TFSA or other accounts, if you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, we’re here to help answer those questions and more as well!

If you are interested in obtaining private projections for your financial scenario, including using the TFSA for your retirement income planning needs, then please read more about our low-cost retirement projections services here.

We have been only happy to support 100+ DIY investors over the last few years with their customized retirement income projections reports and we’re always happy to help more!

As an example of our work and dedication to the DIY investment community, another thanks to Rob Carrick for mentioning our site and services in The Globe and Mail after we launched. From Rob:

“TODAY’S FINANCIAL TOOL

Cashflow$ & Portfolios is the name of a website built to help people learn how to reach their long-term financial goals with budget and long-term investing. Brought to you by a pair of veteran personal finance bloggers.”

We are only happy to help any DIY investor with any cashflow from their portfolio projections reports.

Stay tuned for more great case studies and other income planning content over time.

Mark & Joe.