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TFSA's and Why more People Should be Using Them

Posted 6/15/2018

The TFSA, Tax-Free Savings Account, was introduced in 2009, but is still largely misunderstood. I think that name is the source of the confusion. Banks also sell them as High Interest Savings accounts, which seems right because it goes with the name so well. Your TFSA could be a high interest savings account, but it could also be a GIC, a Mutual or Segregated Fund, you could be invested in Stocks, Bonds, even certain shares in small business corporations. You could own all of those things without it being a TFSA. The TFSA, much like the RRSP, is just the wrapper or package you put around your investment to Register it with our Government so that they don't tax your earnings.

So a little more information on the TFSA. You are eligible to start a TFSA in the year that you turn 18, you don't need to be working. The government sets the limit each year. It started at 5,000 in 2009, went to 5,500 in 2013, then in 2015 it went to 10,000, but was back to 5,500 2016-2018. Your limit is accumulative though so if you haven't used your TFSA and you were at least 18 at some point in 2009 you have 57,500 of contribution room in your TFSA(plus indexation, but no need to go into that).

Earnings inside the TFSA grow Tax-Free, much like your RRSP, the differences are how your money is taxed in the year of contribution and in the year of withdrawal. In the year of contribution your TFSA contribution doesn't change your income level. Your RRSP reduces your earned income dollar for dollar. So in the year of contribution,  you lower your tax bill with the government. However you only defer that tax bill until the year of your withdrawal. Which is great if you're in the top (or a high) tax bracket and you retire in a lower tax bracket. A lot of times without proper planning people take too much out of their RRSP in retirement and that pushes them up into the highest tax bracket, which leads to people being upset because they are paying more money now then they would have paid in the year they earned the income. 

However your TFSA is not included in your income when you withdraw it in retirement. One of the biggest complaints I hear is the percentage the government gets when you withdraw money from your RRSP. Proper RRSP withdrawal planning aside, this is not an issue when it comes to your TFSA. You get 100% of whatever is in your TFSA and it doesn't trigger any OAS Clawback or any extra tax burden because it doesn't bump you into a higher tax bracket! 

Long story short, everyone should be taking advantage of this great tool for accumulating savings. The RRSP is right for some people talk to your advisor if it is right for you, but if you are 18 or older I guarantee the TFSA is right for you. It's so flexible, simple and can be powerful. Start using it today, you'll thank yourself tomorrow!

Insurance services are provided by Kirk Edward Davidson.