5 reasons to use the TFSA

Author: Sound Choices

April 5, 2019

The content in the article below is meant for Canadian investors only.

The Tax Free Savings Account (TFSA) allows you to save money each year without paying any tax on the investment income (interest, capital gains or dividend income) you earn. There are so many things you can save for by using a TFSA. It might be to renovate your home, buy a cottage, go on a vacation or save for your child’s wedding or your retirement. It could even be just to have emergency funds readily available.

Here are five reasons from the Knowledge Bureau why a TFSA could make sense for your financial plan.

1The income accrues and is withdrawn on a tax-free basis.
There is no deduction for the contribution to the TFSA (it’s made with tax-paid funds), but income growth is never taxed. The big criteria to consider in making contributions: the TFSA account holder must be at least 18 years of age and resident of Canada. Another important tax fact is that you never lose your TFSA contribution room. That is, both withdrawn contributions and income may be redeposited into the TFSA, but you must observe recontribution restrictions: do so after the end of the year in which the withdrawal occurred to avoid penalties.

2TFSAs are great for family income splitting.
The Attribution Rules do not apply to the TFSA as resulting income is tax-exempt. However, it’s important that the TFSA-holder contribute the funds. So it makes sense for one spouse to make a gift to the other; subsequent investment of the gift by this spouse to a TFSA is allowed. Parents or grandparents may also wish to gift money to their 18-year-old, resident children or grandchildren in a similar fashion.

3New opportunities for RRSP age-ineligible taxpayers.
The RRSP tax shelter is only available until the end of the year in which the contributor turns age 71, at which time the plan must be converted to a RRIF or annuity. Even if the RRIF/annuity holder doesn’t need the money, taxable withdrawals must begin. However, any amounts not needed for living expenses can be reinvested into a TFSA, where there is no age limitation, allowing those tax-paid funds to grow again – and faster – in a tax-sheltered account, as opposed to a non-registered account. However, annual TFSA contributions are limited to $6,000 in 2019 and the foreseeable future, until indexing levels are met again. Contribution room available to those adults who have never made TFSA contributions is currently $63,500.

4Benefits for single seniors.
RRSP melt-down strategy enhancements. In melting down RRSPs, that is, withdrawing taxable benefit payments, it’s important to draw enough to reach the top of an income bracket; above this, higher marginal tax rates are applied. This is an important strategy particularly if taxes will be higher at death than during life. What to do with the money after-tax? Deposits into a TFSA will continue to build income for retirees on a tax-free basis.

5Estate-planning considerations.
The TFSA loses its tax-exempt status after the death of the planholder, meaning the investment income earned after death will become taxable. However, a rollover opportunity is possible when the spouse or common-law partner becomes the successor account-holder. This rollover will not be affected by the spouse’s contribution room, and will not reduce their existing room either. In the case of a taxpayer dying without a spouse, the plan assets should be transferred to another appropriate savings vehicle.

To find out more about TFSAs, visit AGF.com/TFSA and contact your financial advisor.

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