Why should you use a TFSA for savings and investing?
In a Tax-Free Savings Account the growth is tax sheltered. Assume you invest $3,000 after-tax money annually into a TFSA and the same amount into a non-registered account. Both investments have a rate of return of seven per cent and your marginal tax rate at withdrawal is 40 per cent. Your TFSA would accumulate to $44,350 after 10 years, whereas your non-registered account would only accumulate $41,020, since the return and withdrawal are subject to tax. The difference is $3,330. Tax Free Savings Accounts (TFSAs) are an excellent savings vehicle, however, consideration should be given to who can best benefit from using them as well as why and how you could use them. Provided you have no credit card debt, TFSAs may be your first choice in non Registered Retirement Savings Plan (RRSP) contributions each year. Following is a list of things to consider. Middle Income One strategy would be to contribute to your TFSA now and accumulate RRSP room, to be used later when in a higher tax bracket to optimize the tax benefits. Rainy day or emergency savings would also be appropriate for a TFSA. High Income This is a situation where you may want to maximize both your RRSP and TFSA contributions. In fact, the tax savings or tax refund received from the RRSP contribution could be used to fund the TFSA.
Impact on Income Tested Benefits Federal income tested benefits such as Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and child tax benefits will not be impacted by TFSA assets or withdrawals. Except for Quebec, which has indicated they will follow the federal rules, it is unknown whether other provincial programs such as disability support, student loans, or nursing homes that factor in assets and/or income will be impacted
Flexibility – You can save tax-free and still have the flexibility to withdraw your savings at any time, for any purpose.
Choice – You can choose from a wide range of mutual funds.
Multiple accounts – You can have more than one account as long as the total contribution amount does not exceed your unused contribution room among all of your TFSA accounts.
Tax-free – You don’t pay tax on any money you withdraw from the TFSA. Withdrawals also don’t affect your ability to qualify for federal benefits such as the Child Tax Benefit or Old-age Security.
Tax-sheltered growth – All growth within the account is sheltered from tax.
Carryovers – The federal government will provide you with your TFSA contribution room on the notice of assessment of your personal tax return on a TFSA Contribution Room Statement, or through “My Account” on the Canada Revenue Agency’s website. Any unused contribution room is carried over to the following year.
Andrew W Bradley is a licensed Insurance Broker and Financial Services Advisor helping Orleans families since 2011. Combining this with his previous working experience with the Canada Revenue Agency enables him to help a wide range of individuals, families and businesses. As an Independent Broker he devotes time to educating the consumer and implementing comprehensive financial plans for both individuals and businesses in areas including insurance and investments.
The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. I recommend that you obtain your own independent professional advice (preferably me) before making any decision in relation to your particular requirements or circumstances.