Why Invest in a Tax Free Savings Account?
- All Investment growth is tax free
- Withdrawals are tax free and be can made anytime 1
- Neither income earned within a TFSA nor withdrawals from it affect eligibility for income tested government benefits such as Old Age Security (OAS), Guaranteed Income Supplement (GIS), Canada Child Tax Benefit and Goods and Services (GST) credit.
- Maximum contribution is $5,000/year 2
- Minimum age is 18 with no upper age limit
- Unused TFSA contribution room is carried forward indefinitely
- Withdrawal amounts create additional contribution room in future
- No income requirements in order to contribute to a TFSA
- Assets in the plan can be transferred to a spouse’s plan at death with no affect on the spouse’s unused contribution room
1 Withdrawals will be subject to a $25 administrative fee
2 Yearly contribution will be adjusted in future years according to CPI, in $500 increments
Scenarios
Under 35
Information about the Tax-Free Savings Account is based on what is currently available from the Canadian government and can be subject to change.
Single persons under age 30 may have a number of reasons to invest in a TFSA.
- If they are unsure as to if/when they may marry or if they want to save for a house, a TFSA is a great place to invest and pay no taxes on the growth.
- The accumulated assets could be used toward a down payment on a house, a new car or to pay for a wedding.
- While you can borrow from your RRSP as a first time home buyer, it does have to be repaid over 15 years.
- For married persons under 35, many of the same reasons apply.
- In addition, you may want to save funds that may be necessary to use during pregnancy leave.
Age 35-50
If you are between 35 and 50, some of your investment goals may have changed.
- Many people will utilize a TFSA in lieu of a Registered Education Savings Plan (RESP) or in addition to an RESP for saving toward their children’s education.
- While a TFSA does not receive the benefit of government enhancement that an RESP does, it does not have rules attached to withdrawing funds or tax implications if not used as initially intended.
- With mortgage interest rates at historical lows, some couples may utilize a TFSA to save funds and have them grow tax free with the intent of paying down their mortgage at renewal. These funds could also be used to make renovations to the family home.
Age 50-60
Many people start to have greater concerns about their retirement as they reach age 50.
- The concerns range from having enough income to paying for medical care or as simple as being able to afford that vacation they have planned for many years.
- Medical care costs are very expensive for people over the age of 55. If you take early retirement the likelihood will be that you have no benefits coverage until the Ontario Drug Benefit takes effect at age 65. Current premiums are high and expected to continue increasing by 10% per year. A TFSA is an ideal way to save for this premium cost or the medical expenses.
- If you do not have RRSP room or want to save outside of a registered plan, a TFSA may be the ideal investment vehicle.
Defined Benefit
- A member of a Defined Benefit Pension Plan, probably has very little RRSP room and a TFSA may very well be the only savings vehicle with no tax payable on the growth.
- In addition, a member of a Defined Benefit Pension Plan may have concerns about income tested government benefit such as Old Age Security and the Guaranteed Income Supplement
