You’ve opened your Tax Free Savings Account (TFSA).
You’ve been diligently putting money into it every year and now you realize that this has become an important piece of your financial portfolio. If you were 18 or over when this was launched in 2009, your contribution room is now $52,000 in 2017. This began as simple savings concept, but 8 years later, it’s time to review just how important this is to you and your family.
Tax Free Savings Account. Let’s start by first saying that while it is called a savings account it is NOT actually a savings account – its’ a Tax Free Savings Plan. The money you contribute to your plan can be allocated into the same deposit or investment products available to you in your Registered Retirement Savings Plan (RRSP). You can use a savings account or a GIC, but you are also free to explore other more complex investment options that may be suitable for your financial situation, such as mutual fund, stock, bond or Exchange Traded Fund (ETF) solutions. With so much flexibility in how we can set up your plan, let’s talk about a few life stage situations where TFSA can be exceptionally useful.
Starting Out. We commonly see members that are just starting out their careers, or may even still be in post-secondary school that would like to begin saving some of that extra income. You may be saving for school, a new car, or even a down payment on a home. The TFSA is a perfect tool for this. You won’t get a tax break, but you can use your money whenever you want and it won’t affect your tax situation when you do withdraw it. You may even be saving for the long-term, for retirement. If you have a low salary now, and believe that you will have a higher salary in the future, it may be prudent for you to consider a TFSA contribution instead of an RRSP contribution. You can carry forward your RRSP room to a future year when you are in a higher tax bracket, and make that RRSP contribution even powerful to you later.
Pension Booster. If you have a high salary now, and you are contributing to a very good pension, you still may strongly consider a TFSA for additional retirement savings. If that pension will produce a good income in retirement, coupled with Canada Pension Plan (CPP) and Old Age Security (OAS) payments, your future RRSP withdrawals could push you into a higher tax bracket. You may even have some of your OAS clawed back by the government because of your good savings habits. In an instance such as this, your RRSP may work against you. With your TFSA, you will be able to access lump sums of capital or increase your regular cash flow in retirement without worry of extra taxation, or loss of government benefits.
More Income Planning. In contrast to the previous example, if you have no pension and currently have a low salary, you could be eligible to receive the Guaranteed Income Supplements (GIS) in retirement if you maintain a low income throughout your retirement period. If you had spent all your working years saving in an RRSP, those withdrawals may bump you into a higher tax bracket, and you could lose out on the GIS. The TFSA will produce income in retirement that will not affect your ability to receive GIS, if you qualify.
Your Legacy. The most powerful use of the TFSA is the ability not only to shelter earnings from taxation, but the ability to transition your wealth to the next generation. Unlike a regular savings account, you can designate a beneficiary or successor annuitant to your TFSA. If you pass away, and have designated your spouse as your beneficiary, your tax free savings plan will retain its tax-sheltered status and simply be transferred to your spouse. By designating anyone other than your spouse, the plan loses its tax-sheltered status, however it is paid out directly to your designated beneficiaries with no tax, and no probate fees on the distribution. If that wealth was held in an RRSP, with the exception of a spousal rollover, your entire RRSP is considered to be paid out and therefore fully taxable.
Regardless of your age, income, or employment status, the Tax Free Savings Account is a crucial piece to your financial planning success. We have been working diligently to establish Tax Free Savings Accounts for our members, and to stress how important this piece is in everyone’s financial plan. It is imperative to properly match your TFSA planning goal to a suitable deposit or investment product in order to take advantage of this opportunity to the best degree possible. It is time to get serious about your TFSA. Talk to your financial advisor this year to ensure you are doing the right things with your plan.
Ryan Fontaine, Senior Wealth Consultant
Credential Securities Inc.
The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities. Mutual funds, financial planning and other securities are offered through Credential Securities Inc. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.