Five ways to gain with TFSA’s

Five ways to gain with TFSA’s

Although you’ve been hearing about them for months, Tax-Free Savings Accounts (TFSAs) finally became available on January 1, 2009. At first glance, with a modest annual contribution limit of $5,000, TFSAs may appear to be not worth the effort. Amidst all of the hype and advertisements, T.E. Wealth has identified five ways for our clients to benefit.

Take a long view.

TFSAs are being promoted as a savings vehicle for everything from emergency funds and next year’s vacation to an alternative to RRSPs. We see the value in TFSAs as a long-term program for building additional wealth tax-free. A couple can invest $100,000 over 10 years ($5,000 each per year) and retain all of the investment earnings free of tax.

Make the most of “tax-free” benefit.

We think that investing TFSA assets in savings accounts and other low returning investments misses the point. TFSAs are most advantageous when you can maximize the tax savings and that means focusing on higher growth investments. Add TFSAs to the long-term portion of your portfolio in keeping with your overall asset mix to see the most benefit. Consider holding investments that you expect to rapidly increase in value in a TFSA. If you wish, the investment earnings can be taken out tax-free and will give you additional TFSA contribution room.

Make TFSAs a family affair.

Want to give money to your adult children? Looking to income split with your spouse? With no tax on investment earnings, and therefore no need for attribution rules, you can fund the TFSA of any Canadian resident over the age of 18 without affecting your TFSA contribution room or worrying about from tax consequences. What’s more if your spouse or child withdraws money from the TFSA, you can add it back in the next year. It’s an ideal way for parents to help adult children acquire the funds for a first home, vacation property or private school tuition for their children.

Use the beneficiary designation.

Name your spouse or partner as the beneficiary of your TFSA assets and after your death, he or she can roll the funds into his or her TFSA without concern about tax (and in many jurisdictions, free from probate). If you have unused TFSA contribution room, your spouse can top up your TFSA before the rollover.

Build it into year-end tasks.

You’ll get the most benefit out of a TFSA if you maximize tax-free growth and that means benefiting by getting the money invested as soon as you can. Add funding your TFSA into your other year-end financial tasks – making charitable donations, tax-loss selling, for example and start earning tax-free investment income right away. Make TFSA investing automatic and write the cheque for January 1st of each year.

Contrast and compare


Here’s how TFSAs stack up against RRSPs and taxable investment accounts.

 

TFSA

RRSP

Taxable account

Eligibility

Canadian residents age 18 or older

Canadian taxpayers with earned income up to age 71.

No requirements

Contributions

$5,000 in 2009

Contributions will be indexed to inflation and increase in $500 increments.

Contributions are not tax-deductible

In 2009, 18% of earned income from the previous year or $21,000, less any pension adjustment. Contributions are tax-deductible.

No limit.

Contributions are not tax-deductible

Eligible investments

Same as RRSPs

Mutual funds, stocks, bonds, cash and certain shares of small business corporations.

No restrictions

Investment earnings

Investment earnings are tax-free

No attribution rules for contributions to other individual’s TFSA

Investment earnings grow tax-deferred

No attribution rules for investment earnings in a spousal RRSP.

Investment earnings are fully taxed.

Investment income is attributed back to the contributor.

Withdrawals

Withdrawals are received tax-free and are added to the next year’s TFSA contribution amount.

All withdrawals are taxed as income and are not added to future RRSP contribution room

Investment income is taxed when it is received or accrued.

At death

Investment income after death is taxed, however funds can be rolled over tax free to a spouse if named as beneficiary.

RRSP assets can be transferred tax free to a spousal RRSP if spouse is named as beneficiary.

At death, a deemed disposition occurs (although capital gains can be rolled over to a spouse) and all investment earnings are included as income in the final tax return of the deceased.

Borrowing to invest

Interest on money borrowed to invest in a TFSA is not tax deductible

Interest on money borrowed to invest in an RRSP is not tax deductible

Interest on money borrowed to invest is tax deductible

Use for loan collateral

Yes

No

Yes

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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