6 Reasons Why TFSAs Can Be a Powerful Wealth Builder for Millennials
Author: Sound Choices
March 27, 2018
The content in the below article is meant for Canadian investors only.
The Tax-Free Savings Account (TFSA) is a powerful tool for millennials, who should maximize their contribution room to build a tax-free retirement surplus that is potentially increased by the longer compounding time afforded to the young.
Here are six reasons to consider the TFSA tool in tax planning:
1. Family Income Splitting
There is no attribution rule attached to the TFSA because resulting income is tax exempt. So this is a great opportunity for a higher-earning spouse to transfer $10,000 to the lower earner each year for the rest of their lives to equalize savings pools.
Recipients can take the money out, tax-free, for whatever purpose they wish and create new TFSA contribution room in the process. That is, they can take withdrawals and, once they have accumulated new savings, can put those amounts back in future years to grow.
2. Homebuyers: TFSA or HBP?
In the market to buy a first home? Consider whether it makes more sense to withdraw funds on a tax-free basis from within an RRSP to fund a new home purchase under the Home Buyers’ Plan (HBP), or to save the required funds in a TFSA instead and withdraw them from there when needed.
There are no tax penalties for failure to pay back the funds to the TFSA (as there are with the RRSP), and withdrawals automatically create new TFSA contribution room, so investors should consider with their advisor, the possibility of accumulating funds in the TFSA savings vehicle for the purposes of saving for a home, instead of the RRSP.
3. Later-Life Students: TFSA or LLP?
Going back for a second degree? Saving within the TFSA allows you to accumulate funds on a tax-deferred basis and then withdraw them without penalty or a requirement to repay the funds.
This is not the case under the Lifelong Learning Plan, which allows for a tax-free withdrawal from the RRSP, but requires an annual repayment. If you don’t repay on time under this plan, the amount is included in income and will be taxed.
That tax penalty makes the TFSA a more attractive withdrawal vehicle for later-life students. Better to leave the funds in the RRSP for tax-deferred retirement savings.
4. Education Savings for Minors: TFSA or RESP?
Despite giving up Canada Education Savings Plan Grants and Bonds, the TFSA may appear to be a better savings vehicle for education purposes than the RESP, especially if you start when the child is very young. The latter could eventually attract a significant tax penalty on withdrawal if intended recipients do not end up going to school.
5. Have a pension plan?
Contributors to employer pension plans are often precluded from making the maximum RRSP contribution because of their pension adjustment amount. The TFSA provides the opportunity to make use of another tax-preferred savings opportunity.
Those who have contributed the maximum to an RRSP and want to do more to supplement their savings on a tax-assisted basis, can do so by contributing to their TFSA.
To find out how a TFSA can fit into your financial plan, contact your tax and financial advisor and visit AGF.com/TFSA.
© 2018 Knowledge Bureau, Inc. The contents of this work are copyright protected; all rights are reserved. Users are herewith granted a one-time, limited use license for personal educational use only. This content or any derivative thereof may not be used or reproduced for any other purpose, nor may it be merged, distributed, modified or incorporated in whole with any other intellectual property in any medium or imparted to any party without permission from Knowledge Bureau, Inc. For further information or to request permission for reproduction call us at 1-866-953-4769 or by email at firstname.lastname@example.org. Please see Policies under About Us on the Knowledge Bureau website for full reproduction policies: www.knowledgebureau.com.
The information contained in this brochure is based on material believed to be reliable and is provided as a general source of information, based on information available as of March 22, 2018 and should not be considered any personal investment or tax advice. The information provided has been created and vetted by The Knowledge Bureau Inc. Every effort has been made to ensure accuracy at the time of publication, however AGF Management Ltd. and its affiliates cannot guarantee 100% accuracy of this information, and is not responsible for the development and creation of this material. It is important for investors to consult with their financial and tax advisors before making any investment or tax planning decisions.
The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2021 AGF Management Limited. All rights reserved.