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Moving nonreg to TFSA after retirement... another method (maintaining smoothing throughout)

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You are retired and you have a significant amount of nonreg capital in addition to your RRSP. Over the next years, you wish to have that capital get transformed to TFSA (tax free) status.

Here is the problem as it stands.... the RRIFmetic 'reverse tax math' will attack nonreg capital first whenever there is both reg and nonreg capital available. So, what happens is that, for the early part of the plan, while the TFSA capital (at $5K per year) comes from nonreg, the program continues to grab as much extra from the nonreg pot as it needs. (sheltering the RRSP and attacking the nonreg). The result is that by the time a couple of years has transpired, the nonreg capital has fully depleted, and the TFSA has only a few years of $5K additions... such that any future TFSA capital comes from the RRSP and causes excess tax to be generated.

Solution.... What has to be done is to prolong the lifespan of the nonreg capital by de-sheltering the RRSP. Here is the methodology...

Notice, just below the RRSP box in the capital frame there is a drop-down menu titled "Type".

When you pull it down, there will be several selections... CAP, CAP+1%, CAP+2%, 10% and 20%. Selecting either of these will impact the smoothing math by forcing the RRSP to be attacked... in effect, sheltering the nonreg pot.

As an aside, there is another way to do this, and that is to set the RRIF start age back from 71 to the subject's current age.

Here is what CAP.... etc do. If you set "Type" to CAP, then the RRSP will draw out just the amount of the growth. If the rate is 4%, then it pulls 4%... in effect 'capping' the RRSP, keeping it level. If you choose, CAP+1%, it will draw it down at 5%, CAP+2%... 6%. The choices 10% and 20% will cause an aggressive RRSP drawdown of 10% and 20%.

So, how does this help our 'converting nonreg to TFSA' strategy?....

Remember... we generally want to convert most of our nonreg capital to our TFSA, so if we had $50K in nonreg, then we would like to see approximately $50K in our TFSA (after say 10 years) and zero or a very small amount in nonreg... without causing excess reg withdrawals once the nonreg has depleted. Setting to CAP or CAP+1% will effectively prolong the nonreg's lifespan, thus enabling it to fund the TFSA longer.

You will have to eyeball things a bit. The first thing is to determine how long to contribute to the TFSA. Let's say you had $50,000 in non reg and that you were looking to ultimately have $50,000 (or so) in your TFSA. Now... at $5000 a year, this will take approximately 10 years. Pick 10 years as the time frame... i.e. drop -5000 into your TFSA column (indexed) for the next 10 years.

Secondly... in the capital frame, set the drop-down menu item "Type" to CAP.

Amortize or smooth. Examine the capital graph and observe the behaviour of the nonreg capital. If it depletes before the 10 years, then you are going to have to set the "Type" selection to 'CAP+1%' and calculate again. Repeat, until you see the nonreg capital lasting out up to or beyond the 10 years.

After the calculation, you should see $50,000 at least in your TFSA, and your nonreg close to, but not necessarily depleted.

Awkward, but... now you have a smooth ATI throughout and the calculations are still100% tax-accurate.

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