What to do with your TFSA
For you savvy investors out there — or those planning on investing this year– now is a great time to think about your TFSA contribution for 2015. As of January 1, eligible Canadians (residents over 18) can contribute an additional $5,500 to their TFSAs. That brings the total contribution room to $36,500.
The Tax Free Savings Account (TFSA) is a fantastic way to save to achieve your financial goals in the future. However, only 19% of Canadians are aware of TFSA contribution limits, and only 11% of Canadians could correctly identify the investment types eligible to be held in a TFSA.
A Simple Introduction To Tax Free Savings Accounts
The TFSA was created in 2009 as another investment vehicle to help Canadians save. The money you deposit into the account allows you to earn interest, dividends, and capital gains tax free! That’s huge because taxes can quickly eat up your hard earned investment returns.
Let’s highlight a few key rules…
- Unlike a RRSP, TFSA contributions are not tax-deductible but the contributions and the investment earnings are exempt from tax upon withdrawal.
- Do not over contribute! You are liable to a tax of 1% on your highest excess TFSA amount in that month. That cost can quickly get expensive, so be prudent when depositing. You can have more than one TFSA account at two different financial institutions, but be sure to not go over the total limit.
- If you withdraw money, you must wait until the following calendar year to recontribute.
- You never lose your contribution room if you miss a year. So for those of you who haven’t opened one yet and have been living in Canada, start making those deposits!
- Remember to declare a beneficiary to avoid estate issues at death.
What is the difference between a TFSA and RRSP?
- An RRSP is primarily intended for retirement savings. Tax assistance provided by a TFSA complements that provided through RRSPs.
- RRSP contributions are tax-deductible while RRSP withdrawals are added to income and taxed at regular rates.
- Unlike an RRSP, which must be converted to a retirement income vehicle at age 71, a TFSA does not have any minimum withdrawal requirement.
- There is no TFSA spousal plan. Individuals can provide funds to their spouse or common-law partner to invest in their TFSA, up to the spouse’s or common-law partner’s available room, and the income earned on the contributed amount is generally not attributed back to the spouse or partner who provided the funds.
So, what can you do with your TFSA?
- Use it to trade
If you keep your TFSA in a high interest savings account (HISA), your returns will be anemic. To energize your TFSA, you need a more pro-active strategy – like trading.
- Use it as a retirement fund
We’re not saying to pull everything out of your RRSP—it’s still a great way to save for retirement. But TFSAs are becoming serious competition. They are especially important once you turn 71 when mandatory RRIF withdrawals kick in. If you’re over the $71,000 income threshold, you’ll possibly lose government income benefits.
Since TFSA withdrawals are not taxed, you can use them to supplement your income without adding to your taxable income numbers.
- Use it as your emergency fund
Say your roof caves in or your car starts making that funny noise again, you’re going to need some access to cash. TFSAs are the best umbrella for the proverbial rainy day. You can withdraw as much or as little as you need to keep your budget balanced. And in the following year, you’ll be able to put any withdrawals back in. [Remember, the money in your TFSA is as liquid as the investments you hold. If you want to withdraw, you’ll have to factor in settlement time for the cash to appear in your account.]
- Use it to pass on wealth
TFSA beneficiary are two words your loved ones want you to know. Straight from the CRA’s rulebook: any money passed down to a beneficiary does not need to go through your estate. That means your family won’t get dinged on probate taxes from capital gains. If you can’t remember whether you designated a beneficiary when you opened your TFSA, check your account documentation.
- Use it as collateral
It’s nice to see a big number at the bottom of your statement but that money can do more than look pretty. Put it to work. Your TFSA can be used as collateral when you’re trying to secure a loan, like a mortgage. Better yet, you can build up your savings for the down payment of your home. Then build it up again to make larger payments on your mortgage.
Whatever you decide to use your TFSA towards, we can direct you to our network of Financial Advisors.