New TFSA Limit Reaches Close—But Not Quite—to Proposed $11,000

Last month, the federal budget revealed that the new Tax-Free Savings Account (TFSA) limit had been raised from $5,500 to $10,000 per year. While this is nearly doubled the original limit, it falls short of the expected $11,000. Still, the 82% increase in contribution room will have a significant change in your financial planning. In today’s blog post, I want to take a look at how the new TFSA limit will affect you.

Photo by: GotCredit licensed under Creative Commons Attribution 2.0 Generic

If you are an eligible client who has not contributed since the TFSA was introduced in 2009, you now have a contribution limit of $41,000. Investors who put the full $10,000 will save $3,708 in tax over the course of ten years, and increase their after-tax investment income by 12%, at a 5.5% rate of return. Taking advantage of the new limit produces better results than if you had contributed $5,500 at the original limit and $4,500 to a non-registered account.

Although the budget hasn’t technically been passed yet, the CRA has announced that the change in the TFSA contribution room is effective immediately. So if you had already used up the $5,500 annual limit this year, don’t worry—you can still add an additional $4,500 without being penalized.

It’s safe to say that even with the change, Canadians in the middle tax brackets—those who earn around $50,000 a year—are not likely to contribute more than the original $5,500. This is because that amount represents nearly 20% of their pre-tax earnings, so these numbers make it highly improbable that middle-income clients would make use of the full $10,000 in any case.

The good thing about the new limit is that it greatly benefits both lower-income and wealthy clients. If you are making less than $50,000, the extra contribution room makes TFSAs more preferable to RRSPs because investment income made in a TFSA and withdrawals are both tax-free. With the increased limit, you will find that a TFSA may be ideal for long-term purposes such as retirement. Similarly, clients nearing retirement will find that they can make withdrawals earlier and move their proceeds from a RRSP to a TFSA. Traditionally, the money in a RRSP is left alone for as long as possible before making withdrawals in order to continue the tax deferral. With the money being in a TFSA, they will be now be able to withdraw without incurring taxes.

If you are making more than $50,000 annually, you can now transfer investments in a non-registered account to a TFSA. With more contribution room, clients should look at how much those assets have increased in value and why the money is needed before moving these investments. In addition, you want to put in investments that don’t have much capital gain in order to avoid taxes upon withdrawal. Moving money between a non-registered account and a TFSA allows advisors to manage their clients’ investments more effectively.

A new limit for the TFSA allows advisors more creativity when it comes to helping their clients with financial planning. Be sure to speak with your financial advisor today about what works for you and how to make the most of the new TFSA limit.

Quick Facts

In 2013, 11 million people had opened TFSAs and 1.9 million people had hit their contribution limits.
The new TFSA limit will cost the government about $1.1 billion in reduced taxes by 2020—within 5 years

Related Links
Top TFSAs Myths Debunked
https://www.ironshield.ca/articles/tax-free-savings-accounts-tfsa-myths-and-tips/

TFSA vs RRSP
https://www.ironshield.ca/articles/tfsa-vs-rrsp-wheres-the-best-place-for-your-money/

Tax-Free Savings Accounts (TFSA)—Myths and Tips

Today, I want to talk about a relatively new investment tool—the Tax-Free Savings Account (TFSA). The Tax-Free Savings Account was launched in 2009 and many people are becoming aware of it today. But how much do you really know about them? What are the rules you need to follow? What is the right time to buy a TFSA? Here, I will discuss the top 10 myths and misconceptions about the TFSA and suggest some strategies that will help you make an informed decision about whether or not a TFSA is right for you.

Top 10 Myths

1. A Tax-Free Savings Account is for savings

While a TFSA is primarily used for savings, the name is a bit misleading. It really should be called a “Tax-Free Account” and when used properly, it can also be a powerful investment tool. The idea behind a TFSA is that whatever you make on the account is going to be completely tax free.

2. Tax-Free Savings Account withdrawals will cause clawbacks of government benefits

It’s in the name—tax free. All withdrawals from a TFSA will not affect any government-related income tax benefits. So if you’re receiving Old Age Security (OAS), a Guaranteed Income Supplement (GIS) or other similar benefits, TFSA withdrawals won’t change that.

3. Use it or lose it

Many people think that if you don’t contribute to your TFSA this year, you would lose that contribution room. This is simply not true. Whatever you don’t use during the year gets carried forward and is added to next year’s benefits. For example, the contribution room limit is $5,500 per year. If you don’t make use of this amount, it gets added to next year’s contribution room and you can actually put in up to $11,000 the following year.

4. Always maximize your RRSP first, and then contribute to a TFSA

Everybody’s tax situation is different, so it really depends on the tax rate at the time of your withdrawal. If your income is pretty high now—meaning you’re at a higher tax bracket—take advantage of your RRSP first. By putting money into a RRSP today, the tax savings you are getting on it will be greater because the tax rate at the time of your withdrawal is going to be lower in the future. On the other hand, if the tax rate is higher in the future, focus on your TFSA first. This way, you don’t have to pay taxes when withdrawing from your TFSA at a later date. Lastly, if the tax rate is the same today and at the retirement, both a TFSA and RRSP are equally effective tax savings alternatives.

5. A TFSA must be transferred, used up or completely withdrawn by a certain age

Again, this is false. Unlike a RRSP, which requires you to convert it into an income fund at the age of 71, a TFSA has no restrictions. You can keep money in it for as long as you want. You can also withdraw at any time with no negative consequences. Remember, withdrawals from a TFSA are not taxable, so it won’t affect your tax return.

6. Since it’s made in Canada, everything in the plan must be 100% Canadian

A TFSA is a great solution in Canada, but you don’t have to limit yourself to Canadian investments. Many people assume that they can only buy a TFSA from a bank, and as a result, the money in their account is sitting in cash. But did you know that you can actually buy it from any financial planner who is licensed to sell investment solutions? Take advantage of other investment options such as mutual funds, stocks and bonds.

7. You’re not allowed to have multiple TFSAs

There is no limit to the number of accounts you can have, but I would recommend keeping things simple. The only restrictions are based on your contribution limits, i.e. how much you are allowed to put in each year. These numbers are tracked, not the number of accounts you have. If you do over-contribute, there is a penalty of 1% per month on the excess contribution, so like I said before: keep it simple.

8. Tax Free Savings Accounts are protected from creditors

This is an interesting one because assets in a TFSA are not protected from creditors in cases such as bankruptcy, whereas they are in a RRSP. If you are in a high-risk industry with lots of liability or a business owner who wants to be prepared against creditors, there is a solution. Hold your TFSA with an insurance company and invest in segregated funds. This way, creditor protection can be applied to your assets.

9. Tax Free Savings Accounts cannot be used as collateral for a loan

Most people assume that a TFSA has the same rules as a RRSP, since it is another form of tax sheltered investment. The big difference is that if you are looking for a loan and you need some collateral, you can use your TFSA; however, with a RRSP, you can’t.

10. Investment income generated within a TFSA is tax free for everyone

While assets in a TFSA are completely tax free, this rule does not apply to everyone. If you are a U.S. taxpayer who is a resident in Canada, you are required to report the income earned on a TFSA. The U.S. does not recognize the tax shelter that a TFSA provides to Canadians.

Tip: U.S. taxpayers could consider taking out the money and putting it in a more tax-efficient vehicle.

Quick Tips

1. Transfer investments with high taxable income, such as bonds, into a TFSA

Put bonds and stocks into a TFSA to take advantage of the tax-free growth. The TFSA shelters those assets going forward and the income would not need to be reported on your tax return, which ultimately reduces your tax bill.

2. Income Splitting Strategy

A higher-earning spouse can contribute to a lower-earning spouse’s TFSA with no attribution.

3. For seniors and retirees, use your TFSA as the first source of income

Again, remember that withdrawals from a TFSA are tax-free. Defer your income from your RRSP or RRIF (if you’re above the age of 71), so that you can defer your tax bill as well.

4. If you over-contributed to a TFSA, work with the CRA

Since its launch in 2009, there has been a lot of confusion and millions of Canadians have genuinely made the mistake of over-contributing. If you received a letter from the CRA, respond within 60 days and they will help you fix the problem.

Now that you know the basics about Tax-Free Savings Accounts, you are ready to take the next step! I encourage you to contact us or your financial planner to arrange a meeting and set up your TFSA today.

TFSA and DSC
https://www.ironshield.ca/articles/tax-free-savings-accounts-and-deferred-sales-charges/

TFSA VS RRSP – Where’s The Best Place for Your Money

Photo by: winnifredxoxo licensed under Creative Commons Attribution 2.0 Generic Image has been modified.

A recent online survey conducted in November by Ipsos Reid showed that of over 1200 Canadians, 36% aren’t even contributing to an RRSP (Registered Retirement Savings Plan). If that many people aren’t taking advantage of this age-old investment vehicle, imagine how many are not using the much newer TFSA (Tax Free Savings Account). Add to that the difficulty in deciding which vehicle to prioritize when extra savings are found, and there is a lot of education left to do. When deciding where to place tax-sheltered savings before tax time, let’s first review the basics.

Let’s begin by talking about the difference between an RRSP and a TFSA. This is a very common question, but a better place to start is to explain the similarities. Both of these options are registered accounts, meaning that they are set up through your financial institution and registered with the Canadian government so that the funds within can enjoy tax-sheltered status as they grow. That means no tax needs to be paid on the capital growth that you enjoy within these accounts while the money is still within them. Both accounts have annual limits, but unused portions carry forward to future years and accumulate over time.

The TFSA allows Canadian residents over age 18 to contribute up to $5,500 each year to this account (up from the $5,000 limit that existed between 2009 – 2012). You must use after-tax income to invest in this account. Investment income earned in a TFSA is, however, tax-free, and withdrawals are tax-free as well. So if, for example, you purchase $1000 worth of a particular stock or bond that doubles in value to $2000, you will not be expected to pay capital gains tax on the extra $1000 you gained, even if you sell the stock and remove the money from your TFSA account. This is an excellent way to earn tax-free investment income to help meet your lifetime savings needs. When thinking of retirement, it is also good to know that income earned and withdrawals made from a TFSA post-retirement will not affect a person’s eligibility for federal income-tested benefits such as Old Age Security or the Guaranteed Income Supplement, and TFSA assets can be transferred, generally tax-free, to a spouse upon death.

The RRSP, by contrast, can be contributed to with either pre-tax income or after-tax earnings, but contributing through your paycheque (as many employers can facilitate) provides instant tax-sheltering of those monies. After-tax contributions will provide additional tax relief by reducing your tax owed in the calendar year(s) in which you contribute because the amount contributed can be deducted from your gross income. The annual RRSP contribution limit is based on a percentage of your income (less pension adjustments). There is no minimum age for setting up an RRSP, but the maximum age for contributing is 71. While your investments within an RRSP can grow in a tax-sheltered environment, unlike a TFSA, you will be expected to pay income tax on amounts withdrawn from your RRSP after you retire, as those monies will be considered income.

So now that we have reviewed the finer details of TFSAs and RRSPs, let’s explore a few common scenarios and discuss where you should put your savings this year, and how you should choose between the two types of account.

The most important thing to look at is your current income and your current tax rate. If you are saving for retirement, the RRSP is the best option if your income tax rate today is higher than or equal to what you expect it to be in the future when you retire. Grab the added tax benefits now, when you are in the higher tax bracket. Once your earnings are less (ex: when you are retired and drawing funds from your RRSP as income), your overall tax owed will also be less. The TFSA would only be the better option if you foresee yourself at a higher tax rate in the future. In that situation, there would be no sense putting funds into an RRSP today simply to enjoy tax benefits now when you will have to pull the money back out later on at an even higher tax rate. This requires anticipating and mapping out the income you will receive later in life from pensions, government benefits, and your own retirement savings. A great conversation to have with your financial planner.

In the same vein, if you are counting on government support in retirement, such as the Guaranteed Income Supplement or Old Age Security, the TFSA may be a helpful choice. Those particular government benefits are based on strict income guidelines. If you go over the maximum income eligibility amounts, you will be subject to clawbacks. TFSA withdrawals won’t impact your declared income when you withdraw monies (unlike RRSP withdrawals), leaving your eligibility for those benefits unaffected. If you have a great pension, the amount you receive, combined with RRSP withdrawals post-retirement, could push you into an income level that forces the clawback of those benefits (the most recent amount that forces clawbacks is $70,954), but if you are just using TFSA withdrawals to supplement your pension, you could avoid those clawbacks altogether since your income claimed will be lower.

If you’ve simply got extra money for savings this year and looking to store it away for something shorter-term, like a new car, home renovations, or even just an emergency fund, then use the TFSA before the RRSP. You won’t be penalized when you withdraw funds so accessing the money pre-retirement is easy and penalty-free.

As you can see, there are many detailed and highly personal considerations to be made when considering whether to prioritize RRSPs or TFSAs, and we’ve only just scratched the surface here. Give us a call today and we’ll be happy to walk you through the process and find the best solution for you and your family, or download our FREE Consumer Awareness Guide on How To Choose and Work With a Financial Planner You Can Trust.

Tax Free Savings Accounts and Deferred Sales Charges

There is a potential time bomb lurking in Tax Free Savings Accounts (TFSA) that have investments in them that were purchased using a Deferred Sales Charge (DSC) compensation model.

When I did the math on this, it just reinforced my rationale for encouraging advisors to invest their clients money using no-load investments.

The best way to illustrate this issue is by way of an example.

Mary has a TFSA worth $25,000. She purchased her investments in the TFSA on a DSC basis.

(NOTE: DSC simply means that you as the purchaser are not charged a fee up front to purchase the investments and the advisor who sold the investment to you is paid a commission from the investment company for placing your investments with that company. If you redeem these funds prior the the expiration of the DSC schedule, you as the investor will have to pay all or part of the commission initially paid to the advisor, back.)

Now, a few years later, she needs some money to fund a kitchen renovation. So, she redeems $25,000 from her TFSA because she knows that any withdrawals from the TFSA are considered “Tax-Free”. And, since the TFSA rules allow you to replace your withdrawal from the TFSA in a future year, she feels confident that this is the best place to redeem the cash from.

This feature of being able to re-contribute any withdrawals back into the plan in future years is one of the greatest features of the TFSA, next to its ability to grow the assets on a tax-free basis.

But, when her cheque comes in, it is for $23,750? Why is that?

Well, now we are beginning to see the negative impact of the DSC.

In this example, not only was there a 5% DSC fee that had to be paid before Mary received the funds, but when it comes time to put the money back into the TFSA, she is only able to put back $23,750 as opposed to $25,000 because the DSC fee is considered a charge to the TFSA and is not considered as part of her withdrawal. The rules state that she can re-contribute what was previously withdrawn but she only withdrew $23,750.

What happens to the $1,250 in room that she looses? She looses it forever…

So, when you are purchasing your investments, make sure you are clear on the load structure of the investments. If the load structure is DSC, you want to really understand why this is in your best interest.

A trifecta investment solution designed to enhance performance, reduce volatility and provide a tax-efficient income…

We are in an investment environment that will challenge even the most seasoned investment manager.

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Retirees are looking for safe, secure income solutions and finding it harder and harder to determine the good from the bad. Traditional investment solutions, the ones that people have relied upon for decades, are falling short on their ability to generate the level of retirement income and growth required for most retirees. If you are a retiree today, or if you are approaching retirement, you are right to be concerned.

I understand the concerns. I get the frustration because my clients are in the exact same boat as you.

We are very aware that these issues and concerns about volatility and the need for a reliable income are not going to go away anytime soon. In fact, they are going to get worse because of demographics. Demographics that aren’t just talked about anymore as things that will happen at some point in the future. These demographic shifts are happening right now.

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The solutions we are implementing for clients are designed to accomplish the following:

Reduce overall portfolio risk/volatility
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So, what I have done it put together a complete video explaining the details.

If you are interested in watching the video now (and I strongly encourage you to do so), click on the Watch Video link below and you will be taken directly to the video to watch at your leisure. The video is less than 15 minutes long and will provide you with a very thorough overview of the strategy that may be appropriate for you to consider. At the very least, you will gain some knowledge and insight into a solution to the problem.

It may not be the best solution for you – but at least we’re bringing solutions to the table.

Should you be interested in finding out more about the solutions mentioned in the video, please don’t hesitate to contact me directly.

If you found this information of value, please comment below.

Tag Archives: Tax Free Savings Account

New TFSA Limit Reaches Close—But Not Quite—to Proposed $11,000

Tax-Free Savings Accounts (TFSA)—Myths and Tips

TFSA VS RRSP – Where’s The Best Place for Your Money

Tax Free Savings Accounts and Deferred Sales Charges

A trifecta investment solution designed to enhance performance, reduce volatility and provide a tax-efficient income…

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