What is more important: your assets or your legacy? – Money sense

Let’s dig deeper into this by first understanding what will happen if your dad keeps doing what he’s doing and he doesn’t add money to his TFSA. If he lives to be 90, earns 5% on his investments, your house increases in value by 3%, and we assume an overall inflation rate of 2%, he will leave you approximately $654,000 in today’s dollars. This consists of his share of the home, which is not taxable, and his registered money, which is taxable. I will use today’s dollars (values) for everything. The actual amounts will be higher in the future due to inflation.

TFSA Strategies to Grow Your Wealth

Now the question is, can we increase the amount that ultimately goes to you by withdrawing additional money from the Life Income Fund (LIF) and RRIF to add to his TFSA? Your father has never contributed to a TFSA, so he has room for $102,000 in past contributions he can add, plus his future annual contributions. His LIF withdrawals are subject to maximum withdrawal limits, so he won’t be able to fully deplete his LIF.

Your father has options for contributions: he can top up his TFSA right away or do so gradually. If he tops this up over the next two years, he will have to withdraw approximately $135,000 from his RRIF and LIF in each of the two years. This will cause him to lose his OAS during those years, but his RRIF will be depleted at age 85. His problem will then be that the maximum LIF withdrawals will not be enough for him, so he will have to start drawing from his TFSA.

Still, this approach will increase the after-tax value of the property to $689,000, which is better than continuing with the current approach, which will leave you with $654,000.

A more optimal approach is to catch up on the previous contribution limits by adding $15,000 per year to the TFSA to make up for the previous contribution headroom of $102,000, plus the future annual contribution limits. This approach also means that an OAS clawback will never occur.

This gradual approach will save you €703,000, while only paying €10,500 in taxes. Remember, no TFSA left you $654,000 and $160,000 in taxes was paid.

But be careful what you ask for

Obviously, if your father’s desire is to maximize the amount of money you have left, the best approach is to withdraw additional money from the registered accounts, keep his taxable income below the OAS clawback threshold, and contribute that amount to his TFSA, with you as the beneficiary.

But what if that isn’t your father’s desire and it is instead to maximize his wealth rather than the value of his estate? There are a number of reasons why some people value wealth over the value of assets, including parents who tell me they’ve helped their children enough, those who want to leave money to charity, couples and singles without children, and others who worry about having enough money.

I know it sounds like the two goals, wealth accumulation and estate maximization, will accomplish about the same thing, but they will produce different outcomes. Think about it: When your dad takes money out of his RRIF, he pays taxes, which means less goes into his TFSA, decreasing his wealth. Leaving the money in the registered accounts preserves his assets.

Here is an example where accumulating wealth and giving to charity is the goal. If your father follows the wealth maximization plan and adds money to his TFSA, the charity gets $707,000 and pays about $7,000 in taxes. Contrast this with your father not taking any additional money from his RRIF to add to his TFSA strategy; the charity will receive approximately $796,000 and the estate will owe taxes of $17,000. That’s about an extra $90,000 going to charity.

Is your plan flexible?

I would like to point out that, aside from wealth or asset maximization, there is another reason to have money in TFSAs, and that is to provide taxable/non-taxable income flexibility. If your father is ever faced with large bills in the future, such as for long-term care, it’s good to have a non-taxable source of income to avoid an income tax hike or loss of government benefits.

Alex, you are on the right track. From the information provided, it appears that your father would need to take additional money from his RRIF to contribute to his TFSA. Make sure this meets his goals.

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