You’ve lastly made it. After years of saving, planning, and easily ready, the date arrives when you possibly can lastly retire. Nevertheless, earlier than the celebrations start, many buyers is likely to be met with a couple of surprises. In reality, some contain tax traps for brand spanking new retirees that may make a severe dent in earnings.

Right now, let’s talk about these tax traps, how one can keep away from them, and how one can use your Tax-Free Financial savings Account (TFSA) and a low-cost exchange-traded fund (ETF) to cut back the burden.

OAS clawback

The primary entice? The Outdated Age Safety (OAS) clawback. OAS is earnings-tested; subsequently, as soon as your internet earnings passes the clawback threshold, each greenback reduces OAS by $0.15 till it’s absolutely clawed again! As of writing in 2025, the clawback threshold begins at $90,997. So for higher-income retirees, this will flip a supply of earnings right into a hidden tax in your earnings.

Plus, in contrast to the Canada Pension Plan (CPP), it’s not primarily based on contributions. Subsequently, clawing it again looks like dropping cash you’ve already earned! However don’t fear! There’s a method to assist with the sting. First off, spend money on your Registered Retirement Financial savings Plan (RRSP). For each greenback you make investments, this brings your taxable earnings down for the tax yr. Subsequently, you possibly can deliver your self all the way down to a decrease tax bracket and deliver down your clawbacks.

Moreover, you possibly can mitigate the chance with TFSA dividends. The TFSA doesn’t rely as earnings for tax or OAS functions. So, any money coming your method, you possibly can take pleasure in absolutely. Mixed along with your RRSP, you possibly can be way more earnings in retirement by investing early and infrequently!

RRIF withdrawal

Then there’s the Registered Retirement Revenue Fund (RRIF) and withdrawal on taxation. All that cash you place into your RRSP to deliver down your taxes is being taxed once you withdraw it. At age 71, the RRSP should convert to a RRIF, with necessary minimal withdrawals beginning the following yr. These are absolutely taxable as earnings, pushing you maybe into a better tax bracket and even triggering that OAS clawback.

So, regardless that you won’t want the earnings, you’re pressured to take it out and are taxed to do it! Nevertheless, there’s a strategy to ease that burden. And once more, it comes all the way down to the TFSA. Buyers can put that money right into a TFSA in the event that they don’t want it and make investments it in a protected exchange-traded fund (ETF) like iShares Core Fairness ETF (TSX:VEQT). This can be a low-cost, globally diversified, all-equity ETF that’s excellent for retirees.

With a administration expense ratio of simply 0.20% and about 8,500 holdings, buyers get development and distributions — all with out taxes dragging you down. An important possibility could be to withdraw progressively at 71 to easy out taxable earnings, popping it into your TFSA to lock in future tax-free earnings as effectively.

Backside line

These tax traps can sting in the event you’re not ready. But when retirees simply perform a little little bit of prep work and ideally maintain off till 70, a lot of that sting may be soothed rapidly. The important thing? Investing in a TFSA to maintain taxes down and earnings up.