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 The plans offer great flexibility: investments grow tax free, can be withdrawn at any time on a tax free basis, and can be used for any purpose.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contributions are not tax deductible, all interest, dividends and capital gains earned are not taxed either, even when withdrawn.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.
You can also borrow to invest in a TFSA, and even use the investments as collateral for the loan. Interest paid is not tax deductible, since the earnings you receive are not taxable.
Many investors will also be interested in using ongoing monthly pre-authorized cheque plans, or transferring existing investments from accounts currently taxable. Care needs to be taken when transferring investments, as this may trigger tax consequences.
There are a wide variety of investment options now available, so depending on your time frame, goals and risk tolerance, these may include a high interest demand account or redeemable term deposit for your short term needs (or emergency fund), a guaranteed investment certificate for your medium term needs, or managed portfolios and segregated funds for longer term growth potential, or immediate income needs.
Seniors receiving RRIF payments in excess of their living expense needs can contribute these surplus funds to a TFSA for continued growth and tax savings.
Even though a TFSA and RRSP have different features and benefits, they are designed to compliment each other. While an RRSP is primarily intended for retirement, a TFSA might be for everything else in life.
Depending on your tax rate when you contribute funds, and your tax rate when you withdraw funds, one may have advantages over the other. If you expect to be in a lower tax bracket when funds are withdrawn, an RRSP may be a better choice. However, if you expect to be in a higher tax bracket when funds are withdrawn, then a TFSA may be more advantageous.
Your ZLC Associate can help you work out the best strategy for you.