TFSA Primer 2017

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“Many investors are wondering whether to pursue a TFSA or RRSP strategy. Quite simply, the TFSA, which started in 2009, compliments both the RRSP and RRIF.”

It need not be an either/or approach.
Wise investors embrace the Tax-free Savings Account (TFSA) in pursuit of long term goals, like retirement.

 

I summarize my 2017 TFSA primer:

1.) How TFSAs work

Eligibility:

• Canadian residents, age 18 or older, who have a Social Insurance Number can open a TFSA.

• One TFSA account per individual should suffice most cases. Be aware of plan fees if you own more than one.

Contributions:

• There is no deadline for making TFSA contributions as the unused contribution room is carried forward.

• A withdrawal in any calendar year increases the TFSA room in the following year.

• TFSA contributions can be made in cash or “in kind” based on the calendar year.

• Deemed disposition rules for “in kind” contributions are the same as those for RRSPs.

Your maximum TFSA deposits are as follows:

Year Allowable Deposit
2009 $5,000
2010 $5,000
2011 $5,000
2012 $5,000
2013 $5,500
2014 $5,500
2015 $10,000
2016 $5,500
2017 $5,500*
Totals $52,000

* Same amount annually thereafter

• The maximum 2017 deposit is $52,000 for those who have not yet contributed to any TFSA. This sum is expected to rise by $5,500 annually.

• All unused TFSA contribution room can be carried forward indefinitely to future years. Over contributions will attract a 1%/mo penalty.

Withdrawals:

• You can withdraw funds from the TFSA at any time on a tax-free basis for any purpose. However, understand the plan withdrawal fees that may apply.

• Withdrawn amounts can be re-deposited into the TFSA in a future year without impacting contribution room. Qualifying investments are the same as the RRSP.

• Neither income earned in a TFSA nor withdrawals will affect eligibility for federal income-tested benefits and credits. Such as age credit and the OAS clawback.

2.) How TFSAs differ from RRSPs

• An RRSP is primarily a savings vehicle for retirement. The TFSA can be used for practically everything. Both plans offer advantages, but they have key differences.

• Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA contributions are not deductible.

• Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account are tax-free.

3.) What happens on death or marriage breakdown

• TFSA assets can be transferred to a surviving spouse’s TFSA without affecting the spouse’s contribution room.

• Alternatively, an individual can name a spouse as the successor TFSA account and maintain tax-exempt status.

• In case of a marriage or relationship breakdown, TFSAs can be transferred tax-free between spouses or common-law partners without affecting the recipient’s TFSA room.

4.) Benefits of saving in a TFSA

• TFSA contributors will enjoy additional benefits as compared to saving in an RRSP or cash account. Capital gains and other investment income earned in a TFSA is not taxed.

• Draws from a TFSA can be used for any reason. All withdrawals can be re-deposited into the TFSA in future years. In contrast, only LLP and HBP draws can be re-deposited into the RRSP.

• TFSA deposits have no age limit. RRSP deposits end at age 71, unless there is a younger spouse.

5.) My rules for TFSA/RRSP deposits

• TFSA deposits make desirable saving tools, say an emergency fund, particularly in years of lower incomes. The RRSP contributions make more sense during years of higher income.

• Retirees with RRIF withdrawal regimes can help fund the annual TFSA deposits if they don’t require part or all of the RRIF draws.

6.) Sample TFSA accumulation

Assumptions:

• TFSA deposit of $52,000 was made on January 01, 2017.

• TFSA deposit of $5,500/Yr is made for 25 years, starting January 01, 2018.

 

Return/Yr TFSA Value*
4% $372,600
5% $446,400
6% $536,900

* Figures rounded

TFSAs and RRSPs are both very useful saving vehicles, for different reasons.
Understanding the differences helps make better TFSA and RRSP/RRIF decisions.

Adrian Mastracci, MBA, is portfolio manager for Vancouver-based Lycos Asset Management, specializing in designing and stewarding retirement portfolios. 

 

One thought on “TFSA Primer 2017

  1. “Quite simply, the TFSA, which started in 2009, compliments both the RRSP and RRIF.”
    Quite simply, unless it can talk or write, it can’t. If anything, it “complements” them ;-)

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