Your TFSA as a Vehicle for Retirement
For those uninitiated, TFSA stands for a tax free saving account. TFSA’s appeared on the scene in Canada in 2009, and allow you to save and grow your money free of taxes. The ability to access your money from a TFSA without being taxed is definitely an attractive feature for investors and savers alike. This is in contrast to an RRSP, another similar savings program, where every dollar withdrawn from an RRSP is taxed as income to the individual account holder. You can see the CRA’s TFSA rules more in depth here.
Tax-Free Savings Accounts are a flexible registered account that allows you to save for a wide range of goals such as emergency savings, a special purchase or long term goals like retirement. The banks tend to lead you believe that TFSA’s are limited to cash deposits or GIC purchases but that is just the beginning of the options available to you. TFSA’s can hold Stocks, Bonds, Mutual funds, and ETF’s to name a few options.
The key here is tax-free growth on your contributions in the account
TFSA is your own personal tax shelter that can be used to save and grow your money tax free. How your money should be invested in a TFSA is definitely up for debate. Many will suggest that the least tax efficient investments should be put into your TFSA while others will suggest higher risk types of investments to grow your TFSA room at a much faster pace. Those that do implement this strategy, I do warn of the risks associated with high risk investments in a TFSA. An investment decision that goes wrong can negatively impact the future contribution room of a TFSA. Just like growing your money will increase the contribution room in the TFSA, investments that fall in value will also decrease this contribution room. High risk investments that don’t pan out can cause significant losses and reduction in your future contribution room within your TFSA account. Those types of losses in a non-registered account would at least allow an individual claim against future capital gains to minimize the impact of the loss. Regardless of your decision, careful consideration and a conversation with a financial professional is strongly suggested.
The TFSA system is filled with these wonderful tax breaks. The Globe and Mail has a great article here that can explain some of the great and often unknown features of a TFSA account.
How much can you contribute into a TFSA account?
There is a limit on how much you can contribute to a TFSA and it can be determined by age, time of residency as well as time as a non-resident. You must be 18yrs of age and a resident of Canada to qualify for contribution room in that year. For an individual that has never made a contribution before, you may be entitled to a contribution amount up to $52,000 in 2017. Every year additional contribution room is added to this total for those that qualify.
In 2015 the annual amount increased by $10,000 until a change in leadership at the federal government level, and then the annual amount was reduced to $5500 for years 2016 and 2017. For those individuals that have been contributing but wish to make a withdrawal from your TFSA account, there is another added benefit. You are credited with the exact amount that you have withdrawn as contribution room in the following year. For instance, if you deposit $5,000 that grows to $6,000 and you later withdraw this full amount, you can simply re-deposit that $6,000 at the beginning of the next year. It doesn’t matter the amount that you withdraw, you can always put it back into your TFSA. It is very important not to over contribute to your TFSA. Canada Revenue Agency will penalize those that do over contribute to a tune of 1% per month on any amount over the allowable limit. It may not sound like much but it can really add up over time. To enquire about your TFSA limit you can call 1-800-267-6999 or access your account online.
How a TFSA can outperform an RRSP for retirement savings
RRSP’s are attractive because they allow you to defer tax payments until you reach a lower tax rate, which usually occurs during retirement. However, the benefits from an RRSP can carry some downsides as well. Clawbacks of government programs, such as the Guaranteed Income Supplement and the Old Age Security benefit can limit your disposable income. While clawbacks are not a tax, there is no doubt that they do limit the disposable income that you have available to you.
TFSA’s can, and should be used by people of all ages. It can and will play a very useful tool for those in and approaching retirement. The TFSA can be used for many different types of strategies and benefits, but it’s benefit for retirement purposes will only grow greater as contribution room is accumulate in years to come.
Thanks for reading!
If anything on this blog interests you further, please do not hesitate to reach out to me via email at [email protected] I’d love to talk about my financial services and advice in Vancouver, British Columbia’s lower mainland, and Canada in general.
- Brad Blair, CFP, CIM, FCSI, CHS.