Tax-Free Savings Accounts (TFSAs) are a popular way to invest and save, but not as popular as they might yet become. The 2015 federal budget boosted the contribution limit for TFSAs to $10,000 a year from $5,500.
How significant is the increase? Very! Contributing $10,000 a year to a TFSA for 10 years and earning 5.5% annually, you would earn $35,835. The same $10,000 split every year between a TFSA with the old limit and a taxable account (based on a 21.6% combined federal/provincial tax rate) would earn just $32,127, or 12% less. 1
With all their attractions, you might think that every Canadian would be maximizing their TFSA. Surprisingly, that’s not the case. Government data reveal that only 40% of eligible adults even have a TFSA, and of those who do, fewer than 20% (17.8%) have maximized their contributions. 2
Expand your horizons
Your TFSA can hold the same investments that qualify for Registered Retirement Savings Plans (RRSPs), including mutual funds. If you’re just beginning to build your TFSA, a balanced mutual fund or portfolio fund is an easy way to get a broadly diversified fund for a relatively small cash outlay.
With their flexibility, TFSAs can be a great place to save for longer-term goals like a home. If you’re investing for your children’s post-secondary education, target date funds automatically adjust their asset allocation to provide growth in the early years and then shift to income as the day approaches when you’ll need to withdraw funds to pay for your child’s schooling.
TFSAs and seniors
For older Canadians, TFSAs have some unique benefits:
- In order to contribute to an RRSP, you need to have reported earned income the previous year. With a TFSA, there’s no such requirement.
- You must convert your RRSP to some form of retirement income by the end of the year you turn 71. With TFSAs, there’s no upper age limit.
- TFSA withdrawals won’t affect your eligibility for income-linked government benefits like Old Age Security.
- If you convert your RRSP to a Registered Retirement Income Fund (RRIF), you must withdraw a specified minimum every year. By depositing it into your TFSA (up to your contribution limit), you can continue generating tax-free returns.
Revisit your strategy
The higher limit changes the role that TFSAs can play in your overall financial strategy. Talk to us about how your TFSA fits in your plan and whether we should look to increase (or start) a regular contribution plan to help you contribute up to the maximum.
1) Government of Canada, 2015 Budget, Chart 4.1.6, “Tax savings from increasing the TFSA annual contribution limit to $10,000.”
2) Government of Canada, 2015 Budget, Table 4.1.1, “Tax-Free Savings Account Statistics, 2013.”
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
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