Helping you get the most out of your TFSA
By now you have likely heard of Tax-Free Savings Accounts (TFSAs) and are aware of the basics. Canadians aged 18 years or older can contribute up to $5,000 annually to a TFSA and interest, dividends or capital gains earned will not be taxed. The TFSA is an innovative new account type that is right for every investor. But what is the best way to incorporate this solution into your personal financial strategy?
TFSAs are an extremely flexible investment option that can be used for many types of short-term and long-term goals. Your personal circumstances will guide the best use of a TFSA to deliver maximum benefit. Here are a few options investors may consider:
Non-registered investments: Moving non-registered savings and investments to a TFSA is the first consideration. This will eliminate future taxes on investment income and is something to consider each January. Investments that generate interest and foreign dividend income attract the highest rate of taxation outside sheltered accounts.
TFSAs can also be set up as an account for emergency savings; using a regular Pre-Authorized Debit program can help make this affordable. A TFSA can also help smooth out fluctuating income, or be used to generate tax refunds through RRSP contributions in higher-income years.
Income splitting: Contributions can be made to a spouse or common law partner's TFSA, sheltering the income earned on up to $10,000 each year from taxation. Parents may contribute $5,000 to each of their adult children's TFSA, assisting with education savings or with large purchases (e.g. home downpayment). Keep in mind that these assets then become the child's property. For anyone buying a first home, TFSA withdrawals do not have to be "paid back".
Retirement Savings: Once RSP contributions are maximized, additional savings in a TFSA will grow tax-free. Unlike RRSPs, contributions can continue beyond age 71. What will your expected income be in retirement? If it will be higher in retirement than during your working years, you may benefit more from growth in a TFSA, as the benefit of tax-free withdrawals in retirement may outweigh tax deductions earned through RRSP contributions.
Younger investors may want to build up a TFSA, for eventual contribution to an RRSP when their incomes and tax rates are higher, generating a larger refund.
Retirement Income: RRIF withdrawals not required for immediate cash flow can be moved into a TFSA for continued growth. TFSA assets can also be drawn upon first, postponing higher-taxed RRIF withdrawals, and allowing RRIF assets to continue to grow. Also unlike RRIFs, TFSA withdrawals will not impact income from government programs, can begin at any age, and are not subject to minimum withdrawal limits.
Estate Planning: TFSA assets can be transferred tax-free to a spouse or common-law partner upon death. This transfer will not impact the survivor's contribution room. Upon the survivor's death, no taxes are due on the investment gains in a TFSA (unlike RRSPs and RRIFs, where the entire plan may become taxable).
The flexibility of TFSAs make them ideal for meeting a range of investment goals. Please contact me to discuss some of the above possibilities and how I can help ensure you get the most benefit based on your unique circumstances.
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The information contained herein is for ON residents only and does not constitute an offer to sell or solicit sales in any other Canadian or foreign jurisdictions.
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