Anthony Layton January 25, 2019 Personal Wealth Tony’s Take: TFSAs—more powerful than you might think It’s that time of the year when we’re bombarded by advertising and newspaper articles encouraging us to invest in our RRSPS before the deadline, which this year is March 1. Of course, an RRSP is an important part of retirement planning, but in the short-term, many people are more focused on the tax deduction they get for their contribution. Perhaps, that’s why another vehicle, the tax-free savings account (TFSA) gets relatively little attention, and why its benefits remain under-appreciated by many investors. The main advantage of a TFSA is right there in its name. While contributions are not deductible, your money grows inside the TFSA tax free. You’ve already paid taxes on the money you put in—so no future taxes to pay there—and, provided you don’t overcontribute, the taxman doesn’t have any claim on the dividends or capital gains that accumulate in the account. By contrast, an RRSP isn’t a tax-free plan, but a tax-deferral plan. When you withdraw money from your RRSP, taxes must be paid. And at age 71, you can no longer contribute to an RRSP and the government forces you to either transfer your money to a registered retirement income fund (RRIF) or an annuity—and begin paying taxes on withdrawals. In the case of a RRIF, you must take out a minimum percentage of your fund annually, and that amount increases each year. One of the great features of a TFSA is its flexibility. You can hold any RRSP-eligible investment and withdraw money at any time for any purpose. You maintain your contribution room to return the money later if you choose. Also, you don’t have to stop contributing to your TFSA at a certain age as you do with an RRSP. Available contribution room has been accumulating every year since TFSAs were introduced in 2009. This year’s limit is $6,000—and the total cumulative limit is now $63,500. In just six years, the contribution room will reach over $100,000 (the limit goes up with inflation) and keep right on growing year after year. One interesting strategy is to hold income-producing securities in your TFSA and withdraw that money tax-free each year to help fund your retirement, while maintaining the principal. A word of caution—the Canada Revenue Agency charges a stiff penalty of 1% per month on excess contributions. So, if you’re maxing out your contributions each year, be careful or get some advice. One area that trips up some people is incurring an over-contribution penalty by replacing money in their TFSA the same year they’ve withdrawn it. All contributions made during the year, including the replacement of withdrawals, count against your contribution room. The amount of a withdrawal is added back to your contribution room on Jan. 1 of the following year. A TFSA is a great tool for building long-term wealth that will become increasingly important as the contribution limit grows. Early in the year is a great time to start one or make a contribution to one you already own. Share: Facebook Twitter LinkedIn Email IIROC AdvisorReport
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