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It-s-Your-Life

TFSA strategies

The federal government has increased the annual contribution limit of Tax-Free Savings Accounts (TFSA) to $10,000. Going forward, the annual limit will no longer be indexed to inflation. Canada Revenue Agency (CRA) recognizes these changes as effective January 1, 2015 meaning financial institutions may immediately allow clients to take advantage of the new increased limit.

Canadians can grow their savings much faster because realized income or appreciation from a TFSA are completely tax free. Withdrawals from a TFSA will not affect your eligibility for federal income-tested benefits such as Old Age Security (OAS). Furthermore, amounts withdrawn will be added back to your available contribution room starting the year following the withdrawal. For example, a $6,000 withdrawal in 2015 can be replaced in 2016 without reducing that year’s $10,000 contribution room. Therefore, you can deposit $16,000 in 2016 without over-contributing (assuming no unused room).

 

Saving for Retirement – RRSP or TFSA?

It is usually beneficial to contribute to both plan types. Deciding one over the other will depend on your savings needs and your current and future financial situation. Generally, if you expect to be in a lower tax bracket during retirement, then RRSP contributions provide a benefit in deferring tax until those later years. Should the reverse be true, TFSA contributions may be more attractive.

RRSPs must be converted to Registered Retirement Income Funds (RRIFs), an annuity or withdrawn by the end of the year you turn age 71. TFSAs have no such end date and can continue to accept contributions and shelter income indefinitely. The minimum annual withdrawal requirements from RRIFs, LIFs and annuities are considered taxable income. TFSAs can benefit pensioners looking to minimize their taxable income, especially if they are receiving income from part-time or consulting work.

TFSA contribution limits are the same for everyone regardless of how much you earn or contribute to your pension. If you are already contributing to your RRSP, it might be a good option to save the refund generated into your TFSA. Ultimately, there may be no need to choose one over the other. A TFSA complements your RRSP strategy, as well as other sources of retirement income. Using TFSAs and RRSPs can bring you closer to your goals as part of your overall financial plan.

 

TFSAs are Not Just for Retirement

Short and Medium Term Goals

TFSAs can help to fund a major purchase, such as buying a home, vacation, or emergency fund. Early or unplanned RRSP withdrawals can result in significant taxes owing. RRSP withdrawals are taxed at your current highest tax rate, also known as your marginal tax rate. In most cases, for short-term needs you should access funds in your TFSA before using your RRSP.

 

Income-splitting Opportunity

TFSAs allow an effective way to split income among family members such as your spouse and adult children. You may provide a gift to help them make a contribution to their TFSA. They are responsible for their own account and contribution room. Income tax attribution does not apply on earnings as they are tax-free.

 

Education Savings

A Registered Education Savings Plan (RESP) is a great tool to save for a child’s education. It offers tax deferred growth and matching Canada Education Savings Grant (CESG) of up to $7,200 lifetime while contributions are made before age 18. TFSA savings can supplement your family’s education plan without worrying about additional tax burden on you or your child. When using RESPs it is important to be aware of the restrictions and possible penalties if your child does not pursue post-secondary education. However, TFSA savings are accessible at any time and for any reason.

 

Investment Transfer

You may want to consider transferring investments held in a non-registered (taxable) account to your TFSA, known as an ‘in-kind’ contribution. Please note this transfer could trigger a taxable capital gain, or if you incurred a loss you will not be allowed to claim the capital loss on your taxes. Consult your tax advisor for more information.

 

Estate Planning

TFSAs can help minimize taxes upon your death and maximize your estate. If you name your spouse as successor holder on your account, he or she will inherit and maintain its tax-free status without affecting his or her own contribution room.

Naming children as beneficiaries allows them to inherit the account directly, avoiding probate fees. Note the tax free status is lost on death when the account passes to a beneficiary. Your children could use inherited TFSA funds to contribute to their own TFSA as a tax-free method of inter-generational wealth transfer.

TFSAs are significant savings vehicles for Canadians 18 years or older. Take the time now to consider using it as part of your overall savings and investment strategy.

 

This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent. Scotiabank refers to The Bank of Nova Scotia and its domestic subsidiaries.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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