Lately, one question clients are asking me is whether they should contribute to a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP)? Personally, I really like the TFSA. however it doesn’t have to be an either or choice. Why not do both? If both, in what proportion should you divide your contributions? In order to make an informed decision, let’s quickly review the main features of each program as discussed in last month’s article. I will use bullets to illustrate the features as nothing gets people’s attention more than bullets.
TAX FREE SAVINGS ACCOUNT
- Any Canadian resident age 18 or over may open a TFSA. Contribution is not based on earned income. There is no maximum age for contribution.
- Maximum contribution is $5,000 for each year from 2009 to 2012 and must be made by December 31st of the year of contribution. For 2013, due to indexing the maximum contribution is $5,500.
- There is carry forward room for each year in which the maximum contribution was not made.
- The deposit is not tax deductible, but the funds accumulate with no income tax payable on growth.
- Withdrawals may be made at any time on an income tax free basis. Withdrawals create additional deposit room commencing in the year after withdrawal.
Since 2009, Canadian residents aged 18 and older, can save up to $5,000 each year in a tax-free savings account (TFSA). The plans offer great flexibility: investments grow tax free, can be withdrawn at any time on a tax free basis, and can be used for any purpose. While contributions are not tax deductible, all interest, dividends and capital gains earned are not taxed either, even when withdrawn.
Also since earnings (and withdrawals) are not included in your taxable income, your income tested government credits and benefits like Employment Insurance, Old Age Security benefits, Old Age Tax Credit, GST credit, subsidized nursing home care, Guaranteed Income Supplements, etc. will not be affected.
TFSA contributions are not dependant on having income (or assets), so retirees, as well as those who have no earned income, can also contribute to their own plan. This can be another great opportunity to ‘split income’.
If you do not contribute the maximum amount each year, the unused amount is carried forward so you can use it in the future. And, if you withdraw money from your TFSA, the amount you take out will be added back to your contribution room, so you can contribute it again in the future.