TFSA – getting the best in Tax-Free Savings…

Canada has 13,000,000 Tax Free Savings Accounts worth over $130 Billion …and much of it earning ~ 0%.   That’s why I’m sharing this so you can see the big picture about making your TFSA accounts work more effectively so they can grow your wealth, cut your taxes, reach your personal goals.   And now too since finance minister Joe Oliver raised contribution limits to $10,000 per year you can make even more use of this strategic tax-saving device.  🙂  ....see more at IF YOU MISSED IT ....below!

Pic _ TAX FREEMy aim is to help you get best value in your TFSA because even after 7 years of these plans, people from coast to coast are still losing out on what TFSAs offer.  And financial institutions too easily accept deposits but then stick the money where it pays you nothing.

SO let’s review!  What can your TFSA be doing for you?   First now, consider your age, your income, your status in life. If you’re in a room of 50 people (or perhaps fifty simply represent your family and friends) everyone is at a different stage, age, and wage. So think of your own setting and circumstance;  think also of the people who are important to you;  and now let’s see what impact you can create with TFSAs.

Consider your AGE and STAGE:

1. Age 18 to 25 and you earned too little to use RRSPs for a tax refund.  Using a TFSA means you can build tax-free savings for college, travel, first-home, business start-up, or to invest later in RRSP when rising income puts you in a higher tax-bracket.

2. Age 25-50 and needing an emergency fund but income is tight, mortgage and family expenses are high.  TFSA allows you a place to put some “rainy-day” savings until you need it.

3. Age 55+ and still working:  eventually you may find RRSPs or pensions are just delaying the tax-bill that’s going to hit when you retire.  Building TFSA into your financial plan let’s us arrange how you’ll pay less tax in retirement.  Part of your RRSP belongs to Ottawa.  ALL of your TFSA belongs to YOU.

4. Early and Senior Retirement years:  RRIF and Pension money is perhaps paying more than you need …or beyond that, you worried about the 49% tax-hit – especially if you’re single when death forces all retirement monies into your estate where income tax and fees will devastate these savings.  TFSAs offer rich strategies to reduce taxes while living and at death.

5. Selling a Family Business …and you’re wanting to enjoy a secure and life-long tax-effective income.   Maximizing your TFSA can store an increasing part of what you received from the business, and help optimize your life-income and/or estate planning.

Consider your WAGE and INCOME:

1. Low-income means TFSA is especially valuable.  See above, the age-range 18-25 but this is true at any age.  Consider a fellow I know who had no pension savings but only $18,000 sitting in a bank account:  using a TFSA he can make his money strongly, pay no tax, and remain eligible for low-income supplements in senior years.  Thinking of low-income seniors (or the same fellow when he becomes a senior) they don’t want to pay tax.  Hopefully they get Canada Pension and Old Age Security.  But if they’re truly low-income they’ll also qualify for Guaranteed Income Supplement …so we don’t want other RRSP or RRIF accounts compromising their access to government programs that would supplement their income.

2. Say you earn $50,000 to $250,000 or more ….and you’re paying 30-49% taxes.  If you expect a lower tax-rate in retirement, max your RRSP and then put what you can into TFSA.  If you expect an equal or higher tax-rate in retirement max your TFSA and then optimize RRSP. (We of course want to confirm such details and strategies together with your tax-advisor.)

3. Business income – sometimes an owner mostly draws dividends instead of salary, so TFSAs are a shiny device for tax-sheltering such income when you’re not qualifying for RRSPs.

Make your TFSA grow and work for you:

1. I saw where a bank is paying 0.75% to someone’s TFSA.  Should you accept a TFSA at 1% or less? …even 2% ?   In a world where costs rise with inflation you need to earn more than inflation or your money is sitting idle and wasting away.

Pic _ TFSA2. Even a balanced/income fund could earn 4% or more, and that’s a minimum you need for starters …if you want your money to be earning its way.

3. To kick-start and truly accelerate your growth -- 6% and higher -- combine four or five key strategies of “Life Income Mandates” (LIM) as well as global growth so that wherever the world economy is growing, your TFSA and your wealth will be growing too.

4. TFSAs are best designed so you can draw income when you need (knowing it is tax-free!) yet also build value for your future.  All this, in a manner that fits your own personal goals, needs and circumstances.

Common questions:

1. “Mom’s RRIF forces her to draw more money than she needs, and it’s sitting in her bank account earning nothing. What would be better?”  <> You’re right, federal law makes people draw a sizable amount from their pension and RRIF accounts – perhaps more than they need.  But don’t use the cookie jar or a bank account; use the TFSA and make sure it’s invested along the lines of “life income mandates” or at least a strategic income.

2. “My kids in their twenties are working, and I’ve told them to speed up their RRSPs because pensions might not exist when they’re 65:  right?”  <>  Great for you encouraging your children to save, but consider their tax rate.  If they’re in a low tax-rate, use TFSA for now, and move into RRSPs later when they really need tax relief.  If they’re already paying medium or higher taxes, certainly use RRSPs.  And if possible, use both.

3. “What about fees to invest in TFSAs?”  <>  Ideally half or even 100% of your TFSA has no-fees, no-strings, when you’re wanting to take out money.  A key purpose many have for their TFSA is to use the money for any number of emergency reasons:  lost job, sudden home or auto expenses, tuition and courses, trip of lifetime, buffer when opening new business/career . . . and the list goes on.  So we can make sure you won’t face charges getting easy access to your money.

4. “Can grandpa use a TFSA instead of life insurance?”  <>  Actually no one asked that question but the answer is “yes”.  Sometimes people in their 70s / 80s want life insurance, and especially if designed effectively to protect a family estate.  But the fact is, if you just need some money for burial and services, a TFSA now can serve the purpose quite well.

If you missed it . . .

The clear advantages became even more obvious in the new federal budget (April 21/15) raising contribution limits to $10,000/year.  In Parliament the opposition parties are saying this is a benefit mainly for older, gray, wealth voters ...but that couldn't be farther from the truth.  So here are a few things to be sure you don't miss about TFSAs:

  1. Age 18 and up you can contribute up to $41,000 to your TFSA.  So imagine grandma gives you a major gift and you can't use the tax-deduction of putting it into an RRSP right now.  Where do you put it?  Probably into a TFSA.  You can! And why wouldn't you?  This may be the best tax-planning gift to help Millenials, GenX and GenY avoid taxes while saving for financial & personal goals.
  2. If life's events left you in the cold (financially) with nothing saved for retirement, TFSAs are a plum.  RRSPs comparatively are a raisin.   Imagine having a low-income in your 50s and inheriting money from your parents.   The worst thing might be putting this into an RRSP, getting a pathetic tax-refund, and forcing yourself to pay higher tax in retirement years ...plus lose Guaranteed Income Supplement!
  3. See above, "Consider your Age and Stage" for insights on how to use TFSA at any age, and how these strategies can pay you for Life, even into your Estate.  And if you're needing help pop me an email so we can discuss further for your own circumstances.

What else do you want to know about TFSAs?

Reach me freely to discuss your questions and together we can ensure your TFSAs are built to serve your comfort today and your financial goals for the future.

Yours in Financial Security for LIFE!

Brian Weatherdon, MA CFP CLU CPCA CRC, MDRT.  905-637-3500 x 223
627 Guelph Line, Burlington, Ontario. L7R 3M7.   FREE  1-877-937-3500  x 223
Ret.Coach SEALCertified Financial Planner.  Certified Retirement Coach.
brian@SovereignWealth.ca 
 

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3 comments

  1. Very good advice. The media, with some political prodding, are making TFSA out to be for only the wealthy. I think this blog is the best investment vehicle for young people …ever!

    • Tom you’re right, people will start to lock on to the advantages. TFSA is very adaptable: for savings, emergency fund, strategic growth, tax-planning, even self-insuring in some respects as noted in the blog …but as you infer, the media haven’t figured all that yet. In certified planning the point is …what it can do for YOU! …and with a starting point like that, it can actually do a LOT 🙂

  2. Tim Cestnick confirms further on Estate Value of TFSA by contributing to TFSA from your RRIF. Noting twin sisters turning 72 with equal assets and life-expectancy, one will draw down RRIF faster (at 30% marginal tax) yet save considerably more as the TFSA escapes the 45% tax burden hitting her sister’s RRIF assets at death. (Details at The Globe And Mail, May 18/15 — http://www.theglobeandmail.com/globe-investor/personal-finance/maximize-your-estate-make-tfsa-contributions-from-your-rrif/article24470242/)

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