Whether in retirement or approaching it, your older clients are set to benefit from the introduction of the tax-free savings account in 2009.

The new registered program will give seniors — particularly those who can no longer contribute to an RRSP — a way to achieve investment growth without adding to their tax burden or threatening income-tested benefits.

“The TFSA gives seniors another lever to try to control their incomes,” says Jason Safar, a partner in the tax services practice of PricewaterhouseCoopers LLP in Mississauga, Ont. So, they can avoid additional taxes.

In 2009, all Canadian residents over the age of 18 will be allowed to contribute up to $5,000 a year to a TFSA. All investment growth within a TFSA is tax-free, as is any money withdrawn from the account. Contribution room can be carried forward indefinitely, and any withdrawn amount is added to the contribution room for the following year. Especially helpful for older clients is the absence of age limitations: unlike the RRSP, which must be converted to a RRIF or an annuity in the year in which the individual turns 71, there is no age cut-off for TFSA contributions.

Another advantage for seniors is that any money withdrawn from a TFSA will not affect income-tested benefits, such as the guaranteed income supplement or old-age security. The TFSA allows a senior client to contribute money, grow that money tax-free and then withdraw funds — without adding to his or her taxable income, which otherwise might trigger a GIS or OAS clawback.

The program is especially useful to clients who are 72 and older and who are compelled to make RRIF withdrawals — whether they need them or not — which must be added to taxable income in the year in which the withdrawals are taken out. (See “Mandatory withdrawals,” page B12.) Those RRIF payments, says Wilmot George, specialist in tax and estate planning with Toronto-based Mackenzie Financial Corp., would normally be reinvested in a non-registered account if they were not needed for living expenses, creating a potential taxable situation.

“With the TFSA, you now have a vehicle in which you can continue to invest those [RRIF] assets,” George says. “You put your RRIF [withdrawals] into your TFSA, and any future income generated in the TFSA will not only grow tax-free and can be withdrawn tax-free but also any withdrawal will not affect OAS benefits.”

The other benefit of contributing RRIF withdrawals into a TFSA, George points out, is that assets are being moved from a tax-deferred account (the RRIF), into a tax-free account (the TFSA).

Senior clients will also benefit from their ability to contribute $5,000 to the TFSA of a spouse or common-in-law partner without triggering attribution rules. The ability to contribute to a spouse’s account is an income-splitting tool senior clients can use in addition to pension income-splitting. (See story, below.)

“With pension income-splitting, the spouse doesn’t actually have to give the asset to the other spouse. They just have to report half of it on the spouse’s tax return,” George says. “With the TFSA, the higher-income spouse can actually give the lower-income spouse $5,000 to contribute to the TFSA. The couple can now grow $10,000 tax-free.”

The rules governing a TFSA can also benefit seniors when it comes to estate planning. A TFSA holder can name his or her spouse or common-law partner as the successor accountholder, and the account will keep its tax-exempt sta-tus. If the surviving spouse already has a TFSA, the assets of a deceased spouse’s TFSA can be transferred to the survivor’s account without reducing that spouse’s contribution room.

If there is no surviving spouse, the TFSA loses its status as a tax-exempt vehicle, and the money falls into the deceased’s estate. There are no taxes owed on investment gains earned in the TFSA during the time that the deceased was alive — unlike an RRSP, in which all the assets held in the plan at the time of death are included in the deceased’s tax return for that year.

It might make sense, then, if the senior is in a low tax bracket, that he or she withdraw funds from an RRSP or a RRIF, take the tax hit and contribute the withdrawn amounts to a TFSA to minimize the potential tax liability to the estate.

@page_break@“Instead of having your future growth accrue in a taxable RRSP or RRIF in the years leading up to death, in which the growth would probably be subject to taxes at the top rate, the client draws it down in the years prior to death and invests it in his or her TFSA,” George says. “Now, the money is in a tax-free environment.”

Senior clients will also find the TFSA useful as a program to save for fixed financial goals, such as creating an emergency fund or as a cash reserve for an unplanned big-ticket expense. Seniors approaching retirement sometimes underestimate their cash-flow needs in retirement, says Lee Anne Davies, head of advanced retirement strategies with Royal Bank of Canada in Toronto.

“When they’re in retirement, and they’re spending more time at home, they suddenly realize that maybe their kitchen isn’t as modern as they would like it to be,” Davies says. “Maybe they’re spending more time at the cottage and decide they want to winterize it. We’re telling seniors the TFSA is a way to save money, shelter it from taxes and draw it out when you want to.”

The TFSA could also be a simple way for seniors to set aside money for a grandchild, Safar says, especially if the grandchild’s parents are already contributing to an RESP and the child’s education-savings needs are already being taken care of.

In fact, many seniors may wish the program had been around during their younger years.

“If a young client starts putting money into a TFSA now,” Safar says, “by the time that client is a senior, it will give him or her a lot of flexibility, in terms of how the client is going to control his or her taxable income levels.” IE