When it was introduced in 2009, people weren’t sure how best to use the Tax-Free Savings Account (TFSA). Replace a regular savings account? Complement a Registered Retirement Savings Plan (RRSP)? In the half dozen years since then, numerous strategies have emerged, helping Canadians at every stage of life benefit from tax-free saving.
When you’re starting out, a TFSA is ideal to save for short-term goals, like a vacation or car. It’s also a tax-free way to save for a down payment on a house in addition to or instead of using the RRSP Home Buyers’ Plan, which has a $25,000 limit per person.
If you think you may need to withdraw funds in the near future, start with a TFSA. Later on, when your annual income increases and you pay tax at a higher rate, you can contribute to an RRSP and benefit from a greater tax deduction. You might even consider withdrawing TFSA funds to make an RRSP contribution and then use any tax refund to help replenish the TFSA the next year.
As a parent, you can use TFSA strategies to help your children get off to a good start. For example, you and your spouse might use your TFSAs to help cover post-secondary education costs. When your child turns 18, you can give him or her the funds for his or her own TFSA. Your child can draw down these funds over the course of the school year, as needed.
A TFSA is an ideal spot for investments that you expect to earn the highest returns possible, as returns are completely tax-free both within the account and upon withdrawal. But that’s just the beginning of the many ways you might make the most of the TFSA’s unique attributes.
Income splitting. You can gift funds to children 18 and over and your lower-income spouse for their own TFSAs — without attribution back to you.
Retirement savings. A TFSA is an ideal complement to your RRSP for retirement investing. It’s also a great way for a non-working spouse to save for retirement.
Estate planning. Let’s say you want to create an inheritance for your adult child. By dedicating the TFSAs belonging to you, your spouse and child, you can make annual contributions of $16,500 (indexed for inflation). Funds grow tax-free and are paid out tax-free. If you plan on leaving your TFSA to your spouse, funds can be transferred to your spouse’s TFSA without affecting his or her contribution room.
Another estate planning application involves taxes payable by your estate. You can designate TFSA assets to help offset the tax liability so your heirs receive more of what you planned to leave.
TFSA withdrawals are not considered taxable income, so they’re an excellent way to support your retirement lifestyle, especially if you’re in a higher tax bracket. Withdrawals won’t affect tax credits or reduce your eligibility for income-based benefits, such as Old Age Security (OAS).
If the withdrawals you are required to make from your Registered Retirement Income Fund (RRIF) are more than you need to cover your living expenses, you can put the excess in your TFSA, where it can grow free of tax.
And finally, here’s a strategy for the pension income credit that can be sweetened with a TFSA. At age 65, you transfer $14,000 from your RRSP to a RRIF and make $2,000 annual RRIF withdrawals from 65 to 71. These withdrawals allow you to claim the credit available on the first $2,000 of eligible pension income. Now, deposit the withdrawals in your TFSA and stretch the tax benefits even further.
We can help you make the most of your TFSA at every stage of life. With another $5,500 of contribution room available for 2015, now is a great time to come in and talk to us.