The hidden gem in your financial plan.
By Pamela Mundell, CFP, CLU, CHS | June 2019
It’s time to take another look at the tax-free savings account (TFSA). Many people have embraced the TFSA as a fantastic way to save for education, travel, emergency funds, down payment for a home and retirement savings. The TFSA is a great option for all savings goals.
Refresher on the basics
The TFSP was introduced in 2009 to allow Canadians to save and shelter investment earnings from income tax. This is one of the few options Canadians must make an investment return and not pay tax on those earnings. A TFSA can be opened by any Canadian resident who is 18 years of age and over. There is no age limit. Starting in 2009 each year you could contribute $5,000 to your TFSA. This amount is indexed and rounded up to the next $500. In 2019,$6,000 is the new contribution amount for the currenct tax year. Your contribution room accumulates and if you have yet to open a TFSA as of 2019 you have$63,500 in available contribution room. The TFSA is much more than a bank savings account with little or no interest earned. The TFSA can hold many different investments.
TFSA – saving for retirement
The TFSA is an excellent option for long term investing. Open a self-directed TFSA and hold a variety of investments to meet both your short term and long-term needs. Find an investment company that will open a self-directed TFSA with no fees. Invest a portion in a high interest investment option that pays a high interest rate but is also liquid and can be redeemed with 24 to 48 hours for emergency funds or travel plans. A portion can also be invested longer term for growth in ETFs, investment funds (both mutual and segregated funds), or individual stocks or bonds. You can hold many different investment options within one self-directed plan.
TFSA – passing money to children or grandchildren
You can name a beneficiary on your TFSA and the money invested in the TFSA will pass directly to your named beneficiary. The TFSA does not create a taxable liability to your estate. The funds pass outside of your estate and will not attract probate fees nor estate administrative fees. This is a great option for funds that you would like to pass to your children or grandchildren but still want to retain control during your lifetime. A TFSA with a long-term objective can consider ETFs, investment funds (both mutual and segregated funds) or GICs with laddered maturity dates or individual stocks or bonds. The TFSA can hold many different types of investment and as the investor you can select the investment product that best suits your investment goals based on time horizon and risk profile.
TFSA – tax planning
If you have GICs outside of a registered plan or any investment that is outside of a registered plan and have unused TFSA room, you are missing the opportunity to shelter those investment gains from tax. A GIC from a bank or trust company creates interest income which is reported on T5 each year. This interest is reported on your income tax return and creates a tax liability. A GIC within a TFSA does not report investment income. Investment funds, both mutual funds and segregated funds, may report capital gains and dividend income on T3 each year. This potentially could also be sheltered with a TFSA.
TFSA – saving for a down payment on a house
While this might not apply to you, it could be the best advice you give your grandchildren (or children). Open a TFSA with a bank that offers a high interest savings account with no fees. Interest is calculated daily and paid at the end of each month. These funds are liquid and easily accessible when you find the perfect home and make an offer. Interest is typically higher than a regular savings account. Ensure the bank is a member of the Canadian Deposit Insurance Corporation (CDIC). The CDIC is a federal Crown corporation that protects investor deposits in the event of bank failure. Deposits must not exceed $100,000 per registration and funds must be payable in Canadian currency to be eligible for CDIC. Savings account, chequing accounts and GICs with terms of five years or less are covered under CDIC. Coverage is free and automatic.
The take away
If you are not fully utilizing the TFSA contribution room available to you, consult with a trusted professional. Speak to a financial planner or tax accountant before you make any changes or transfers or redemptions from your investments. Please ensure you will not trigger unnecessary capital gains or redemption fees before you make any changes to your investments.
Pam Mundell is a long-time contributor to Fifty-Five Plus and a Certified Financial Planner (CFP). She is a Chartered Life Underwriter (CLU) and Certified Health Insurance Specialist (CHS) who is the sole principal of Pam Mundell Financial Planning Service in Kingston, Ontario. You can reach her with your questions or comments at firstname.lastname@example.org.
NOTE TO READERS: THE VIEWS OF THE AUTHOR DO NOT NECESSARILY REFLECT THOSE OF COYLE MEDIA GROUP. THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE, OR A SOLICITATION TO BUY SERVICES. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.