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WEALTH ADVICE

 

Your Guide to Tax-Free Savings Accounts (TFSAs) 

 

The TFSA Investment Guide

The Tax-Free Savings Account is the most powerful tax-advantaged investment vehicle available to eligible Canadians. Just like other registered accounts like Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP), a TFSA is a tax-sheltered means to grow your wealth. Unlike the other plans however, there is no limit on how you use your savings. It is important to use a TFSA to its full advantage to see your wealth grow, without having to pay tax on the earnings!

How to use your TFSA

You have likely been contributing to your TFSA for many years and know the differences between how it and your RRSP work. The RRSP contribution limit changes each year but is generally 18 percent of your earned income in the previous year. In this way, an RRSP allows you to defer your taxes while saving for retirement. The most important thing to understand is that you will pay tax on this money once you withdraw it.

All forms of income from your investments inside your TFSA are tax-free. This means any interest, dividends and capital gains are yours to keep. It is an excellent savings vehicle, but beyond that, a TFSA is a powerful investment tool. It is important to note that withdrawals made will be added to your TFSA contribution room at the beginning of the following year. TFSA withdrawals can only be replaced in the same year if you have available TFSA contribution room.

Make the most of your TFSA every year

Every year you can put more money into your TFSA. You can invest in a multitude of investments including mutual funds, stocks and more. Your wealth advisor will be able to give investment strategies on how to maximize your returns in your TFSA as part of your overall financial plan. Every year, the contribution limit increases and accumulates, which means that if you don't reach the limit one year, you don't lose it. Please visit the Canada Revenue Agency website for full details on TFSA limits.

Year            TFSA Contribution Room            TFSA Cumulative Limit
2022 $6,000 $81,500
2021 $6,000 $75,500
2020 $6,000 $69,500
2019 $6,000 $63,500
2018 $5,500 $57,500
2017 $5,500 $52,500

 

Maximizing the benefits of a TFSA

No matter what you are saving for or how you are planning to use your TFSA savings, there is no wrong answer. Your regular contributions and dedication to saving is ensuring that your future is financially secure.

Here are a few tips to keep in mind to truly maximize the benefits of your TFSA:

  1. Resist using your TFSA for short-term financial goals.
    You want to earn as much tax-free investment income as possible. If you are constantly pulling dollars out for short-term goals you will sacrifice dollars that can be made from dividends, increases in stock prices, bonds, EFTs, etc. The longer you let your TFSA grow, the more income you will generate. Try to not use your TFSA as a savings account that you withdraw from.  
  2. Gifting savings to an TFSA
    Even though a spousal TFSA does not exist like with a RRSP, the higher income earner in your relationship can gift dollars to their partner. This can help achieve family income splitting and there is no negative impact on tax credits. There is no tax deduction like with a spousal RRSP, but the income earned in the TFSA is tax-free. If you have maxed out your RRSP contributions, this is a great strategy to consider.  
  3. Invest in retirement
    If you are retired and can comfortably meet your monthly expenses, you could invest in your TFSA to continue to grow your wealth. It's also important to note that once you stop working you no longer generate RRSP contribution room, because you no longer have an income, and once you turn 71 you can no longer pay into your RRSP.  Since TFSA withdrawals are exempt from taxes in retirement, there is no impact on the benefits you receive from the government. The TFSA also does not require any minimum annual withdrawals.

Flexible TFSAs 

There are very few limitations with a TFSA. You can use it to save for a real estate investment, a new boat or for additional retirement income. You can withdraw your money with ease. The funds in your TFSA are always accessible.  

Once you make a withdrawal from your account you earn back the contribution room. This gives you the flexibility to use your investments in the way that works best for you. For example, if in 2020, you had $69,500 in your TFSA and you took out $2,500 for a trip, that would leave you with $67,000. 

$69,500 - $2,500 = $67,000

You don't forfeit that contribution room: you are still able to put in an extra $2,500 to meet the cumulative $69,500 contribution limit. You will have to wait until the next calendar year to make that contribution, but you can always make it up!

Planning for the future 

Since TFSAs are so flexible, they are important vehicles to utilize at every stage of your life and financial plan. As you plan for retirement, and when you reach retirement, there are a lot of considerations for funding your golden years, but also for the financial legacy you will eventually leave behind. As part of your estate plan, a TFSA allows you to transfer funds to beneficiaries, tax-free. For your other assets like property and even your RRSP, your beneficiaries will be subjected to taxation. A TFSA not only gives you flexibility now but also in the future.

A TFSA as part of your overall financial plan 

Beyond growing your savings and minimizing your taxes, a TFSA can help you achieve your financial goals. From investment, retirement, tax and estate planning a TFSA can bolster your financial future. Talk to a financial advisor today to make use of the TFSA as a powerful investment tool.  

Contact our Member Advice Centre or email us to connect with a financial advisor who can help you make the most of your Tax-Free Savings Account.


 


Mutual funds, other securities and securities related financial planning services are offered through Qtrade Advisor, a division of Credential Qtrade Securities Inc. Mutual funds and related financial planning services are offered through Qtrade Asset Management Inc. Financial planning services are available only from advisors who hold financial planning accreditation from applicable regulatory authorities.